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The ATO released Draft Tax Ruling TR 2011/D3 setting out its views in relation to when an SMSF income stream (or pension) commences and ceases. The ATO's views on these issues now provide clarity for SMSFs in relation to a number of issues including:
For simplicity, in this article we refer to superannuation income streams as 'pensions'.
The ATO has recently clarified its views on a number of key issues affecting SMSF pensions — particularly in relation to when they:
The Draft Ruling was available for public submissions until 26 August 2011, with the final Ruling to be released after considering the submissions. When the Final Ruling is released, the views of the ATO will become legally binding and have effect from 1 July 2007.
The ATO's Draft Ruling deals with each stage of SMSF pensions, from their commencement to their completion. Under the Income Tax Assessment Act 1997, an SMSF pension is defined to include annuities and pensions as described in subregulations 1.05(1) and 1.06(1) of the SIS Regulations.
The commencement day of an SMSF pension is defined as being 'the first day of the period to which the first payment of the pension relates'. In the ATO's view, the commencement day would most commonly occur on the day the member submits an application for a pension to the trustee.
However, the exact date that will become the 'first day of the period' may depend on the terms of the SMSF's trust deed. Other considerations will also be relevant: for example pensions may be subject to cooling-off periods or other requirements, which will affect its commencement day. These considerations include 'pre-conditions' which the ATO identified.
Even though an SMSF pension may start on the day of an application by the relevant member to the trustee, the ATO has indicated a number of pre-conditions that must be met before the pension can commence.
In the ATO's view, a pension cannot commence until all the capital that will support it is available in the pension account, such as when a contribution is received or the ownership of an asset is obtained. So, if a member applies to the trustee to purchase a pension and the asset supporting the pension (for example, a commercial property) has not yet been transferred to the SMSF, then the pension will not (and cannot) commence until the property has been transferred.
In addition, the ATO considers that a pension will not commence before:
The ATO's view in the Draft Report is that an SMSF pension will end if one of a number of events occurs. Some of these events are listed below.
If an SMSF member with an SMSF pension dies, then the ATO is of the view that normally the pension comes to an end. However, the pension continues if it is automatically transferred to another person and that person is a 'pension dependant' — for example, a spouse or adult child under the age of 25.
The issue is 'Does the trustee have a discretion about how to treat a deceased member's pension?:
In the ATO's view, the benefit of a pension is only automatically transferred to a dependant if the rules of the pension specify that it is to do so. For example, under the Cleardocs Pension Pack:
The pension will end:
In both these cases, the trustee must pay any remaining entitlement as a superannuation lump sum, which no longer receives the preferential tax treatment of a pension.
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.
You can read earlier ClearLaw articles on a wide range of SMSF topics here.
 Subregulation 1.03(1),
Daniel is a Senior Associate in the Maddocks Tax & Revenue team.Daniel advises extensively in the following areas:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Daniel worked at a Big Four Chartered Accounting Firm focusing on tax consulting for mergers and acquisitions.
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