Draft Taxation Ruling TR 2011/D3
This important and controversial draft ruling (released in July 2011) outlines the Commissioner’s views on when a “superannuation income stream” commences and when it ceases, and consequently when a superannuation income stream is payable.
These concepts are crucial for a superannuation fund to qualify for a tax exemption on its assets set aside to pay current pensions. The exemption for current pension income under Subdiv 295-F of the ITAA 1997 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 to determining the tax consequences of a superannuation income stream benefit paid to a member (including the application of the proportioning rule at the time the income stream commenced).
Commencement of income streams
The Commissioner considers that a series of periodic payments that relate to each other is a “superannuation income stream” (ie an account-based pension) if the pension requirements of regs 1.06(1) and 1.06(9A) of the SIS Regs are met.
The draft 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 is determined by the fund’s trusts deed and the terms and conditions agreed by the trustee and the member.
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, it cannot occur prior to the day on which the member and the trustee have agreed or the time at which an entitlement to start the income stream arises (eg, after a cooling-off period) in relation to a member or dependent beneficiary. Example 1 in the draft ruling indicates that a superannuation income stream will commence on the application date where the product disclosure statement (PDS) specifies that it will commence on the application date.
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 by way of contribution or rollover to the relevant superannuation interest from which it is to be paid.
Beneficiaries who are not considered financial dependants, such as adult children, are not eligible to receive a reversionary pension and must be paid a lump sum. Concerns have been expressed that where a fund is required to sell assets in order to pay a lump sum, CGT may be payable on any capital gains realised at that time.
Cessation of income streams
Once a superannuation income stream commences, it is payable until such time as that it ceases.
The draft 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. Broadly, a “dependent beneficiary” (or reversionary beneficiary) refers to a dependant of a member who commences to receive a pension after the member’s death: reg 6.21(2A) of the SIS Regs.
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.
Binding death benefit nomination
A superannuation income stream is considered by the Commissioner 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.
Date of effect
When finalised, the ruling is proposed to apply from 1 July 2007.
