Defined benefit pensions: Relaxing the rule son transferring "asset-test exempt" income streams | ClearLaw Legal Bulletin

September 2007

The ATO's latest thinking on the Sole Purpose Test for SMSFs

Defined benefit pensions: Relaxing the rule son transferring "asset-test exempt" income streams

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Michael Taylor-Sands
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Phone: 03 9288 0555

Michael joined the Revenue Group of Maddocks in 2005 having previously been a Senior Associate at Baker & McKenzie.

Michael has considerable experience in consulting on tax and stamp duty issues to a wide range of corporate and non-corporate clients. He has advised large multi-national and Australian corporate groups in the manufacturing, property development/investment and gaming/casino industries. He advises on the tax implications arising from various forms of transactions, including acquisitions and divestitures, corporate reorganisations and capital raisings. He has had particular experience with inbound investment for both corporate groups and individuals and regularly advises in relation to Capital Gains Tax, CFC/FIF rules, withholding tax and Australia's tax treaty network.

Pensioners have new options to shift their existing defined benefit pension to new providers without losing the significant social security means test exemptions. The change is a relaxing of the rules in May 2004 budget and of the modifications since then.

Kien Nguyen and Julian Smith

Background

For pensioners who are already receiving a complying defined benefit pension (such as a life pension) through their SMSF, the full exemption they receive for social security means tests is something to be protected. There are two main reasons:

First, SMSFs could only commence these pensions up until 31 December 2005, and only if the person was eligible to receive retirement benefits before that time.
Second, they provided a full exemption from the means test — rather than the 50% exemption available for market-linked pensions commenced on or before 19 September 2007.

The problem has been that if pensioners were no longer able to run a SMSF they risked losing the full exemption if they stopped the defined benefit pension and sought to continue it through a retail provider. The change allows them to do that and to still enjoy the exemption.

Summary

Now the Government has made a determination (Determination) concerning an income stream arising from closing a SMSF. The Determination states that an income stream (such as a defined benefit pension described above) may continue to receive the exemption if:

an SMSF member's partner dies, or another member dies, and the surviving member wishes to close the fund and therefore needs to rollover to a new "asset-test exempt" income stream; or
an SMSF member wishes to close the fund due to administrative obligations becoming difficult in old age and therefore needs to rollover to a new "asset-test exempt" income stream.

This article deals only with the transfer of defined benefit pensions from SMSFs to other retail providers. However, the Determination covers a range of other circumstances — for example: if a pensioner is being paid a market-linked pension which receives a 50% exemption from a retail provider, and wishes to exercise choice and transfer to another retail provider.

Details of the Determination and its effects on SMSFs

A new income stream can be considered as an "asset-test exempt" income stream (and continue to receive a full exemption) if it meets a number of specific requirements, including:

being purchased by the primary beneficiary; and
not being sourced from a SMSF; and
resulting from commuting another "asset-test exempt" income stream (Original Income Stream) as a result of the closure of a SMSF because:

the Original Income Stream was sourced from a SMSF; and
the Original Income Stream was:
(a) until the commencement of the Determination, covered by the Social Security (Partially Asset-test Exempt Income Stream — Exemption) (FACS) Principles 2005; or
(b) covered by the Determination.

The rules are in Section 12 of the Determination.

In addition to the above requirements, both the new income stream and the Original Income Stream:

must also be governed by section 9A or 9B of the Social Security Act 1991 (Cth), or
would have been governed by those sections if paragraph 9A (1) (aa) and subparagraph 9B (1) (a) (i) of the Social Security Act 1991 (Cth) did not apply.

Conclusion

The Determination is good for SMSF members (and is good policy) as it reflects the reality that retirees cannot be expected to maintain their SMSF forever.

However, making the rule change by way of a determination is unusual and is not conducive to clear policy-making. The Determination is difficult to find and is relatively obscure — having been issued by the Minister under sections 9A(6) and 9B(5) of the Social Security Act 1991.

More information

You can find more information:

in the documents set out below (which are not yet available online through the government); and
about this article, or superannuation generally, from Maddocks on 03 9288 0555 — ask for a member of the Maddocks Superannuation Team.

The documents are:

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