Super Fund Pension draft ruling will apply from 2007 – will your Superannuation Pensions comply?

The ATO has recently released draft ruling TR 2011/D3 – Income tax: when a superannuation income stream commences and ceases. This ruling is proposed to apply from 1 July 2007 and its relevance for advisers and trustees is high, as it determines the stages in which a member’s account balance is in tax exempt pension phase, or taxable accumulation phase.

The first aspect of this ruling is the determination of when a superannuation income stream commences. In order for a superannuation pension to be deemed as ‘commencing’, and consequently in order for the member to receive concession taxation status via their superannuation pension account, there are a number of requirements that must be satisfied. These requirements are largely manifested in the documentation that needs to be put in place for the pension commencement.

Determinations of when a superannuation income stream commences

• A superannuation income stream cannot commence until the capital supporting the pension is appropriated to a pension account in respect of the member receiving the pension.
• 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 date is determined by reference to the Fund’s Trust Deed, the terms and conditions of the pension documentation, and the relevant regulations set out in the Superannuation Industry (Supervision) Regulations 1994.
• A superannuation income stream cannot commence prior to the day on which the member and the trustees of the Fund agree on the terms and conditions that will govern the pension.
• A superannuation income stream cannot commence prior to the day on which the member or dependant beneficiary requesting the pension becomes entitled to the superannuation income stream under the terms of the Superannuation Fund’s Trust Deed.
• Once a superannuation income commences, it will continue to be payable until it is deemed to cease.
  
  

Important Outcomes for accountants and advisers

• Your superannuation trust deeds need to provide the terms of the pension in detail, not just in a general pension clause.
• Your superannuation trust deeds need to clearly outline the circumstances in which a member or beneficiary is entitled to receive a superannuation pension. Important provisions would include conditions of release for the members of the Fund, reversionary pension requirements and death benefit payments provisions.
• The member and the trustee need to have agreed to the terms and conditions that will govern the superannuation income stream. This means a comprehensive pension agreement must be put in place.
  
  

Determinations of when a superannuation income stream ceases

Just as importantly, this draft ruling outlines the circumstances in which a superannuation pension is deemed to cease. A superannuation pension is deemed to cease as a result of the following events:

• Failure to comply with the pension rules and payment standards of the SISR. If the minimum pension payment is not taken in a financial year, the pension will be deemed to have ceased entirely for that financial year, despite any entitlement of the pensioner to receive payments from the pension in subsequent financial years.
• If the minimum pension payment is not taken in one financial year, but there is an entitlement continuing in the pension, a new pension will be deemed to commence in the subsequent financial year that the minimum pension payment is made.
• A superannuation pension will cease when the capital supporting the pension is exhausted
• A superannuation pension will cease if the pensioner fully commutes their entitlement in the pension to a lump sum
• A superannuation pension will not cease as a result of a partial commutation of a member’s entitlement in the pension
• If the pensioner dies, unless a dependant beneficiary is automatically entitled to receive the superannuation pension under the terms of the Fund’s Trust Deed or the pension documentation relating to the income stream, the superannuation income stream will cease at the time of their death.
  
  

Important Outcomes for accountants and advisers

• SMSF trustees need to be aware that if any of the payment standards under the SISR are not met, the pension will be deemed to not exist in that financial year.
• Your superannuation trust deeds and pension documentation need to comprehensively outline:
  • Reversionary beneficiary and death benefit payment provisions in relation to the superannuation income stream.
  • The requirements for pension payments during the course of the pension
  • What occurs when a partial or full commutation of the income stream occurs
    
    

See the draft ruling in full TR 2011/D3 – Income tax: when a superannuation income stream commences and ceases

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Please note this article is for information purposes only and does not constitute legal advice. Should you have any queries or require more information, please contact the team at Topdocs on 1300 659 242.