The Australian Taxation Office (ATO) has recently released draft Tax Ruling, TR2011/D3 which outlines when a pension commences and when it ceases.
This draft income tax ruling is by no means “earth-shattering” in the context of the views expressed by the ATO. However, it does provide clarity around when a pension commences and ceases, in particular since there has been little guidance since the introduction of Simpler Super from 1 July 2007.
I have outlined below a few of the more ‘interesting’ matters from this draft tax ruling:
1. No tax dependants (death benefit)
Most noteworthy was the ATO’s view that a superannuation income stream ceases as soon as the member in receipt of the pension dies, unless a dependent beneficiary is automatically entitled under:
- the terms and conditions of the pension (auto-reversionary), or
- a valid binding death benefit nomination.
Importantly, the ruling states that where there is a level of discretion to pay either a lump sum or pension in the event of the member’s death, then the pension stops (and a new pension would be required to be purchased).
The views contained within this draft ruling effectively means that assets of the fund will convert back to accumulation phase and be subject to CGT on disposal. Therefore, the impact of both CGT and estate tax on any of the member’s taxable component benefit should get you thinking now about how to best deal with these issues from a strategy viewpoint.
Register your interest for our August InPractice webinar on Anti-detriment strategies, where you can understand how to effectively reduce or eliminate any CGT as outlined above. Details of this webinar will be available later this week.
2. Failure to meet minimum pension requirements
The ATO has confirmed that an income stream will cease for income tax purposes if the conditions of the relevant pension are not met (e.g. minimum amount taken from an Account Based Pension). This means that the fund would also not receive a tax deduction for current exempt pension income for the financial year (0% tax rate). Any amounts taken will be treated as lump sum amounts for the financial year. The continuing pension being paid to the member will need to form part of a new pension in the following year. The proportioning rule must be applied when the new income stream commences as well.
NB. Rather than simply losing the tax exemption for the entire financial year, it is arguably better to commute the pension back to accumulation at a point where the pro-rata minimum has been met for the financial year.
The ruling outlines some key differences between a full commutation versus a partial commutation and whether the superannuation income stream ceases.
- A superannuation income stream ceases upon a valid request to fully commute the pension; and
- A superannuation income stream does not cease upon a valid request to partially commute the pension.
Having read this draft ruling several times, there appear to be some unresolved matters; in particular aspects relating to transition to retirement income streams. These include:
- Does the pension cease if more than a 10% maximum is taken?
- What are the illegal early access issues if the minimum pension is not met by a TTR pensioner? Amounts are to be taxed as lump sums but have been paid from preserved benefits where member has not met a cashing condition.
With the ATO having recently outlined in their 2011/12 compliance program to look at various SMSF compliance issues current pension exempt income (ECPI), this ruling is a timely reminder to understand the payment of income streams.