ATO ID 2014/5: Superannuation Product: superannuation income stream
Date of decision: 7 February 2014
Year of income: Year ending 30 June 2013
Business line: Public Groups and International

Issue
Are amounts paid by the trustee of a superannuation fund to a fund member a superannuation income stream benefit under subsection 307-70(1) of the Income Tax Assessment Act 1997 (ITAA 1997) where the amounts paid are attributable to an account balance of the member and the trustee has agreed to protect part of the member's account balance for an agreed period of time?

Decision
Yes. Amounts paid by the trustee of a superannuation fund to a fund member are a superannuation income stream benefit under subsection 307-70(1) of the ITAA 1997 where the amounts are attributable to an account balance of the member and the trustee has agreed to protect part of the member's account balance for an agreed period of time.

Facts
The trustee of a superannuation fund offered eligible members of the fund the option to receive pension benefits that satisfied the minimum annual payment requirements in sub-subregulation 1.06(9A)(a) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Under this option, the trustee maintains an account balance that is attributable to the member. The account balance reflects the value of the member's entitlement to receive benefits from the trustee, and is calculated by reference to the value of assets that the trustee holds to support its obligation to the member. The trustee also offered the eligible members the option to protect all or part of their account balance. Under this option, the trustee agreed that if the account balance was less than a predetermined amount (the protected amount) at a given time in the future (the end of the protection period), then the trustee would credit the amount of the difference to the account balance. This would effectively increase the account balance at the end of the protection period to the protected amount. The amount that is credited to the member's account under the protection option will then become part of the member's account balance that is used for the purpose of determining the minimum amount that will be paid as pension benefits each year so as to satisfy the pension minimum payment amount requirements in sub-subregulation 1.06(9A)(a) of the SISR. The protected amount is calculated by reference to the account balance at the time the protection option was selected, any earnings credited to the account until the end of the protection period, any fees imposed by the trustee and an agreed level of withdrawals (including pension payments) that could be made from the account during the protection period. The protected amount is increased by amounts credited to the account and decreased by fees imposed and withdrawals from the account. However, the protected amount is not reduced where the trustee makes negative investment returns on the assets held in relation to the account balance. This outcome arises even where there is a reduction in the actual account balance of the member. An eligible member chose both the option to receive pension benefits and also the option to protect their account balance. The trustee entered into an arrangement with another entity (X entity) in order to ensure that it would have sufficient assets to support its obligation to the member in relation to the account balance protection option. X entity agreed that it would pay to the trustee at the end of the protection period an amount equal to the amount by which the account balance at that time was less than the protected account balance amount. This agreement only covered the one member of the fund. Separate agreements would be entered into if other members selected the protection option.

Reasons for decision
Summary: Under subsection 307-70(1) of the ITAA 1997, a superannuation income stream benefit is a superannuation benefit specified in the Income Tax Assessment Regulations 1997 (ITAR 1997) that is paid from a superannuation income stream. A 'superannuation benefit' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 307-5 of the ITAA 1997. Subsection 307-5(1) states that a 'superannuation benefit' is a payment described in the table which includes under item 1, 'a payment to you from a superannuation fund because you are a fund member'. Under subsection 307-70(2) of the ITAA 1997 a 'superannuation income stream' has the meaning given by the ITAR 1997. Regulation 995-1.01 of the ITAR 1997 provides that a 'superannuation income stream' means (among other things) a pension for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA), in accordance with subregulation 1.06(1) of the SISR. A benefit will be treated as a pension under subregulation 1.06(1) of the SISR, if: Sub-subregulation 1.06(9A)(a) of the SISR applies to 'a pension in relation to which there is an account balance attributable to the beneficiary'. The sub-subregulation requires that the pension payments are made at least annually and that the total payments in any year are at least equal the amount calculated under Clause 1 of Schedule 7 to the SISR. A pension that satisfies the requirements of sub-subregulation 1.06(9A)(a) of the SISR is defined under subregulation 1.03(1) of the SISR to be an account-based pension. In this case, the amount of the pension benefits that will be paid by the trustee to the member is determined by reference to the balance of the account established in relation to the member. This account reflects the value of the assets that the trustee holds to support its liability to the member. When the trustee receives the payment from X entity and credits this amount to the account of the member, there is an increase in the account balance to include the amount paid in relation to the protection option chosen by the member. This increase in the account balance for the amount of the protection does not in itself change the nature of the payments that are being made to the member. Rather, the amount credited to the account affects the amount of the payments that will be made each year to the member. Also, there is no change in the terms and conditions under which these amounts are paid from the account. The amount of the payments continues to be determined by reference to the account balance which includes the credited amount from that point. Accordingly, there is a continuation of the same pension that was already being paid by the trustee. The provision of benefits as described above are in relation to an account-based pension. These benefits are paid at least annually and the total of the payments in any year is at least the amount calculated under Clause 1 of Schedule 7 of the SISR. The provision of the benefits is therefore identified as a payment of a pension in accordance with sub-subregulation 1.06(9A)(a) of the SISR. This pension is a 'superannuation income stream' as defined in regulation 995-1.01 of the ITAR 1997. This payment would be described as a 'superannuation benefit' as it is a payment from a superannuation fund to a fund member as provided under subsection 307-5(1) of the ITAA 1997. Accordingly, this payment is a superannuation income stream benefit.

Legislative references: Income Tax Assessment Act 1997 section 307-5 subsection 307-5(1) section 307-70 subsection 307-70(1) subsection 307-70(2) subsection 995-1(1)
Related public rulings and determinations: Taxation Ruling TR 2013/5
Related ATO interpretative decisions: ATO ID 2009/151
Subject references: Superannuation interest Superannuation pension