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Date of article: 6 October 2011
Last updated: 6 October 2011

Draft Taxation Ruling TR 2011/D3 Income tax: when a superannuation income stream commences and ceases

The tax office recently released Draft Tax Ruling TR2011/D3 providing the Commissioner’s preliminary view about when a superannuation income stream commences and ceases.

The commencement day and cessation day is important for the purposes of determining the exempt current pension income.

When a superannuation income stream commences

The draft ruling states that a superannuation income stream commences on the first day of the period to which the first payment of the superannuation income stream relates.

The first day of the period to which the first payment relates must be determined by reference to the superannuation fund rules and other documentation applying to the relevant superannuation income stream.

This means that first payment does not need to be made on commencement date. However, if the rules of a superannuation fund provide that a superannuation income stream becomes immediately payable on commencement, the commencement day for the superannuation income stream will be the day on which that payment occurs and not before.

Typically, it will be necessary for:

  • A member to apply to the trustee of the fund to receive a superannuation income stream. It is possible for the application date to be the commencement day for the superannuation income stream if it is the first day of the period to which the first payment relates. However, the commencement day cannot be prior to the member's application.
  • A member and the trustee agree to the terms of the superannuation income stream. The commencement day cannot occur prior to the day on which the member and the trustee agree to the terms and conditions that will govern the payment of the superannuation income stream.

The draft ruling provided this example:

A member applies using the relevant application form to receive a superannuation income stream (an account based pension). The form requires the member to specify the frequency of payments as monthly, quarterly, half-yearly or yearly and to specify the month in which the first payment is to be made. The rules also provide the superannuation income stream payable will commence on the date of a member’s application. A member applies on 9 July, to receive monthly payments of $2,000 commencing in August, and the superannuation fund receives the request on 10 July. The superannuation income stream will commence on 9 July as the rules state it will commence on the application date.

When a superannuation income stream ceases

The draft tax ruling states that a superannuation income stream ceases when there is no longer a member who is entitled, or a dependent beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit from a superannuation interest that supports a superannuation income stream.

The common circumstances which a superannuation income stream ceases are outlined below.

Exhaustion of capital

A superannuation income stream ceases when the capital supporting it has been reduced to nil.

Full commutation

A superannuation income stream ceases upon receipt of a valid request from a member or a dependent beneficiary to fully commute their entitlements to future superannuation income stream benefits for an entitlement to a lump sum.

However, a superannuation income stream will not cease upon receipt of a person's application to partially commute some of their entitlements to future superannuation income stream benefits for an entitlement to a lump sum.

The amount payable to the person upon a partial commutation of a superannuation income stream is a superannuation lump sum for income tax purposes as the member is taken to have made an election under paragraph 995-1.03(b) of the ITAR 1997 for that payment not to be treated as a superannuation income stream benefit. The superannuation lump sum will count towards the minimum payment requirement in subrequlation 1.06(9A) of the SISR 1994. This would be the case regardless of whether the partial commutation payment is made in cash or in specie.

Death of the member

A superannuation income stream ceases as soon as the member in receipt of the superannuation income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund's deed, or the rules of the superannuation income stream, to receive an income stream on the death of the member.

The reasoning behind this view is based upon the concept that when a member dies they no longer have an entitlement to receive superannuation income stream benefits, unless there is a nominated reversionary dependent beneficiary.

The effect of the ceasing of the superannuation income stream is the reverting of the superannuation interest to taxable phase – income and capital gains.

While a superannuation interest is supporting a pension, income and capital gains from assets supporting that interest will be tax exempt. However, if the superannuation interest reverts to taxable phase, capital gains from disposal of assets may arise, and these gains may be large if the cost base was not managed.

This is one reason why superannuation income streams are established with reversionary dependent beneficiary. A dependent beneficiary is a spouse; a child under 18 years of age or a financially dependent child that is under 25 years of age; or a child with disability.

Failure to comply with the payment standards

A superannuation income stream ceases for income tax purposes if any of the requirements of the SISR 1994 relating to the payment of the superannuation income stream are not met in an income year.

A failure to meet minimum annual payment requirements will cause the superannuation income stream to cease. The superannuation income stream ceases for tax purposes at the beginning of the income year.

Is your pension property documented?

As above, the ATO holds the view that a pension commences when the necessary documentation relating to the pension is in order. Otherwise, it is taken not to have commenced - which means the earnings on the capital in the superannuation fund supporting the pension is not exempt from income tax.

Talk to us about commencing or revieweing your pension and the documentation requirements.

 

More information and contacting us

If you wish to discuss the above, please contact us. Our contact details.