Draft taxation ruling TR 2011/D3 has finalised as TR 2013/5 and SMSFD 2013/2. Outlined below is a summary of the ruling and the determination, and their implications for SMSF members.
TR 2013/5 When a superannuation income stream commences and ceases
Commencement of superannuation income stream
The ruling states that a superannuation income stream (account based pension or transition to retirement income stream) may commence before the due date of the first payment, depending on the rules governing the superannuation income stream; but the commencement day cannot precede the date of the member’s request or application. A superannuation income stream cannot commence until all capital is received.
Example: A member of the XYZ Superannuation Fund applies on 9 July to receive monthly payments of $2,000 commencing in August, and the superannuation fund receives the application on 10 July.
Scenario 1: The governing rules of the superannuation fund provide that the superannuation income stream payable will commence on the date of a member’s application. The superannuation income stream will commence on 9 July.
Scenario 2: The governing rules of the superannuation fund state that the superannuation income stream commences on the first day of the month after a member’s application is received. The superannuation income stream will commence on 1 August.
Scenario 3: The governing rules of the superannuation fund state that the superannuation income stream cannot commence before the end of the statutory cooling off period that is imposed by the Corporations Act 2001. The superannuation income stream will commence the day after the cooling off period ends.
Cessation of superannuation income stream
The ruling states that 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 to receive an income stream. The superannuation income stream also ceases if the minimum annual pension amounts are not paid in an income year, or when a member’s request to fully commute their entitlements to a lump sum takes effect.
However, an income stream does not cease when a member or dependent beneficiary applies to partially commute some of their entitlements to a lump sum. When a partial commutation takes effect, the member may make an election for the payment of the partial commutation to be treated as a superannuation lump sum. The election must be made before the partial commutation is paid.
Although not being covered in this ruling, recent legislation Income Tax Assessment Amendment (Superannuation Measures No.1) Regulations 2013 has inserted among other things, reg 995-1.01(3), which broadly provides that the pension exemption will continue past death until:
- if the pension is not automatically reversionary – as soon as it is practicable to pay the death benefits or
- if the pension is automatically reversionary – until the trustee or reversionary beneficiary ceases the pension
SMSFD 2013/2 Partial commutation of superannuation account based pension
This determination states a payment made as a result of a partial commutation of an account based pension (other than a transition of retirement income stream) counts towards that minimum annual pension payment amounts unless the partial commutation payment is rolled over within the superannuation system on or after 6 June 2009. An amount rolled over before 6 June 2009 may also count towards the minimum annual amount required to be paid. The payment can be in the form of cash or in specie.
A payment made as a result of a full commutation cannot count as the account based pension ceases before the payment is made.
Impact on SMSF trustees and members
Organise the paperwork
SMSF members and trustees need to pay close attention to pension start dates. TR 2013/5 states that a pension’s commencement day cannot precede the member’s request or application. It is best practice to have a member’s request or application when starting a pension.
For a partial commutation to be treated a lump sum, the election must be in place before the partial commutation payment is made.
Failure to meet pension minimum in the year of death
A pension automatically ceases for the entire year if there was a failure to meet minimum annual payment requirement. Any payments received would be taxed as lump sums. When a member dies before the minimum pension is paid, the payment already made during the year could potentially be treated as lump sum, and the underlying assets supporting the pension could be taxed in the fund. TR 2013/5 seems to provide a carve out in this situation. It states: “A pension may be payable for a period of time even if the member dies before any payment is due to made under the terms of that arrangement. That is, based on the member’s entitlement to a series of related payments over an identifiable period of time there is a pension in existence up to the time of the member’s death.”
Lump sum payment counts towards minimum pension
For those under 60, the first $180,000 of taxable component within a lump sum payment is tax free. A payment can be treated as a lump sum in the hands of the recipient, at the fund level, the payment counts towards satisfying the minimum pension requirements and the SMSF is still eligible for pension exemption.