Superannuation income streams: commencement and cessation (and commutation) - Taxation Ruling TR 2013/5
This Ruling, released on 31 July 2013, sets out the Commissioner's final views on when a "superannuation income stream" commences and when it ceases, and consequently when a superannuation income stream is payable. The Ruling was previously released as Draft Ruling TR 2011/D3 (see the earlier ClearLaw article here) and has been subtly revised in several respects. Since the Draft Ruling was released on 13 July 2011, there has been a lot of debate about when a pension ceases. The final Ruling confirms the Commissioner's views in relation to account based pensions and transition to retirement income streams.
When a superannuation income stream commences and ceases is relevant for a superannuation fund to qualify for a tax exemption on its earnings from assets set aside to pay current pensions. This exemption for current pension income (ECPI) only applies in respect of a commenced "superannuation income stream" that is "payable" by the fund at the relevant time and has not ceased. The principles are also relevant for determining the tax consequences of a superannuation benefit paid to a member (including the application of the proportioning rule to determine the tax free and taxable components).
Commencement of income streams
The 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. This "commencement day" must be determined by reference to the terms and conditions of the superannuation income stream agreed by the trustee and member, the rules of the superannuation income stream (as set out in the fund's governing rules) and the SIS Regulations.
The Commissioner accepts that the commencement day may occur before the due date of the first payment, depending on the rules which govern the superannuation income stream. However, the commencement day:
- "cannot precede the date of the member's request or application";
- cannot occur prior to the day established as the commencement day in the terms and conditions agreed between the member and the trustee; and
- cannot occur prior to the time at which a member or dependant beneficiary becomes entitled to the income stream under the governing rules (for example, after a cooling-off period).
[Thomson Reuters note: the final Ruling has been revised from Draft Ruling TR 2011/D3 which simply said that the commencement day could not occur prior to the day on which the member and the trustee agreed to the terms and conditions that will govern the superannuation income stream.]
The Tax Office also considers that a superannuation income stream cannot commence before all of the capital which is to support that income stream has been added (that is, "received") by way of contribution or rollover to the relevant superannuation interest from which it is to be paid.
The Commissioner defines an "income stream", within the meaning of a "superannuation income stream", as a liability to pay a series of "periodic payments" that relate to each other over an identifiable period in accordance with the pension requirements of regulations 1.06(1) and 1.06(9A) of the SIS Regulations. While a liability to make a single payment each year for a number of years can satisfy the definition, a single payment for one year will not be an income stream.
Cessation of income streams
The Commissioner considers 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. More specifically, the 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.
While the ITA Regulations specify that an amount that supports a commenced superannuation income stream is always treated as a separate superannuation interest, the Tax Office says this does not mean that once an income stream commences it can only cease once the amount in the relevant interest is exhausted.
Common circumstances in which the Commissioner considers a superannuation income stream ceases include the following.
Failure to comply with pension rules in SIS Regulations
A superannuation income stream ceases for income tax purposes if any of the pension rules and minimum payment standards in regulations 1.06(1) and 1.06(9A) of the SIS Regulations are not met in an income year. The Tax Office says this is the case even if a member remains entitled to receive a payment from the superannuation fund in relation to the purported superannuation income stream under the terms of the superannuation trust deed, or under general trust law concepts.
Furthermore, the trustee is taken not to have been paying a superannuation income stream "at any time during the income year" in which the relevant requirements are not met. If the superannuation income stream has not met the minimum pension payment rules in Schedule 7 of the SIS Regulations for the income year, any payments will be a superannuation lump sum. If the requirements are again met in the following income year, the Tax Office says this will result in the commencement of a new superannuation income stream (which will require the proportioning rule to be re-applied).
Thomson Reuters note: The Commissioner has previously indicated that he will exercise his powers of general administration (GPA) to allow a superannuation income stream to continue in certain circumstances from 1 July 2007, even though it has not met the minimum pension standards: see Tax Office document, Self-managed super funds - starting and stopping a superannuation income stream (pension).
Exhaustion of capital
A superannuation income stream ceases when the capital supporting it has been reduced to nil, and the member's right to have any other amounts applied (other than by way of contribution or roll over) to their superannuation interest has been exhausted.
A superannuation income stream ceases when a 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 takes effect. The Ruling states that a request to fully commute a superannuation income stream takes effect as soon as the trustee's liability to pay periodic superannuation income stream benefits to the member or a dependant beneficiary is substituted with a liability to pay that member (or dependant beneficiary) a superannuation lump sum. As the liability to pay the commutation lump sum arises as a consequence of the full commutation having taken effect, the Commissioner says the superannuation income stream ceases before the time that the lump sum payment is made. The payment made to the member (or dependant beneficiary) following a full commutation of a superannuation income stream is a superannuation lump sum.
A superannuation income stream does not cease when a member (or dependant beneficiary) applies to partially commute some of their entitlements to future superannuation income stream benefits for an entitlement to a lump sum.
When a partial commutation takes effect, the member (or a dependant beneficiary) may make an election for the payment of the partial commutation to be treated as superannuation lump sum (instead of an income stream benefit) for income tax purposes. The Tax Office says the election must be made before the partial commutation payment is made for it to be treated as a lump sum. The election can only be made if the requirements of regulation 995-1.03(a)(i) to (iv) are satisfied. If the election is not made the payment resulting from the partial commutation is a superannuation income stream benefit.
Note that SMSF Determination SMSFD 2013/2, also released on 31 July 2013, provides that a payment made as a result of a partial commutation of an account based pension (other than a transition to retirement income stream) counts towards the minimum annual pension amounts, unless the payment is rolled over on or after 6 June 2009. However, the Tax Office says that a payment made as a result of a full commutation cannot count towards the minimum annual pension amounts as the account based pension ceases before the full commutation payment is made.
Death of member
The Commissioner considers 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 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. If a dependant beneficiary of the deceased member is automatically entitled to receive the income stream upon the member's death, the superannuation income stream continues.
A superannuation income stream is considered to have transferred on the member's death if a valid binding death benefit nomination is in place at the time of the member's death that entitles a dependent beneficiary to receive a superannuation income stream. The Tax Office says the nomination must be binding on the trustee, in respect of both the beneficiary who will receive the benefit, and the form of the benefit. If the trustee may, or is required to, exercise discretion in respect of either of these conditions, the superannuation income stream is not considered to have been automatically transferred.
The Commissioner also accepts that a superannuation income stream may be payable for a period of time even if the member dies before any payment is due to be made under the terms of that arrangement.
Thomson Reuters note
The Ruling does not refer to the recent legislative amendments that allow the tax exemption for fund earnings on investments supporting superannuation income streams to continue following the death of a pension member from 1 July 2012. To this end, the definition of "superannuation income stream benefit" has been expanded to allow superannuation funds to dispose of pension assets on a tax-free basis to pay death benefits as soon as practicable following the member's death. Regulation 307-125.02 of the ITA Regulations also provides an alternative proportioning rule to calculate the tax free and taxable components of a superannuation benefit paid after the death of a pensioner from 4 June 2013.
Date of effect
The Ruling applies from 1 July 2007 (as originally proposed). However, the final Ruling acknowledges that there are a range of current practices that derive from views that are different from those expressed in the final Ruling. Accordingly, the Commissioner said he will not take compliance action in respect of a superannuation income stream that ceases on the death of a member before the 2012-13 income year.
Furthermore, the Commissioner accepts that a partial commutation payment made before 31 July 2013 is a superannuation lump sum payment, unless the person has treated the payment as a superannuation income stream benefit. This follows the original approach in Draft Ruling TR 2011/D3 which stated that, upon a partial commutation of a superannuation income stream, the resulting payment was a superannuation lump sum for income tax purposes as the member, by making the choice to partially commute the income stream, was also taken to have made an election under regulation 995-1.03(b) of the ITA Regulations for that payment not to be treated as a superannuation income stream benefit (effectively, for the payment to be treated as a superannuation lump sum). However, from 31 July 2013, the final Ruling requires the person to actually make the election under regulation 995-1.03 before a partial commutation payment is made for that payment to be treated as a superannuation lump sum.
Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please:
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 Regulation 995-1.01 of the ITA Regulations.
 Sections 295-385 and 295-390 of the Income Tax Assessment Act 1997.
 Regulation 995-1.01(2) of the ITA Regulations.