Private ruling: Exempt current pension income
Published: July 2013
Ruling period: Year ending 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: 1. Is the income of the superannuation fund exempt for the whole income year where a member commences a transition to retirement pension at the beginning of the income year, turns age 60 part way into the income year and receives the pension payment at the end of the income year? 2. Will the member have to include as assessable income a pension payment in respect of a transition to retirement pension that commenced at the beginning of the income year where the member turns age 60 part way into the income year and receives the payment at the end of the income year? | A1: 1. Yes. 2. No.

Relevant facts and circumstances: The superannuation fund (the Fund) is a self managed superannuation fund (SMSF). There are X members of the Fund. The members of the Fund are over 55 years of age. You advised that both members are in the pension phase in the relevant income year. The pensions are account based pensions and commenced on 1 July 20XX. The assets of the Fund are segregated. One member of the Fund will withdraw the minimum pension in the relevant year.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 295-385 | Income Tax Assessment Act 1997 section 301-10

Reasons for decision: Summary: The income of the superannuation fund is exempt for the whole income year where a member commences a transition to retirement pension at the beginning of the income year, turns age 60 part way into the income year and receives the payment at the end of the income year. The member will not have to include as assessable income a pension payment in respect of a transition to retirement pension that commenced at the beginning of the income year as the member turned age 60 part way into the income year and will receive the payment at the end of the income year. | Detailed Reasoning - Exempt current pension income: The income of superannuation funds is generally taxed at a concessional rate of 15%. However, subdivision 295F of the ITAA 1997 operates to exempt from tax the income of a superannuation fund earned from assets that are used to finance superannuation income stream benefits which includes transition to retirement income streams. This is referred to as exempt current pension income (ECPI). The ECPI exemption can be claimed by all complying superannuation funds including self managed superannuation funds. There are two methods for working out the amount of ECPI for a superannuation fund paying superannuation income stream benefits: · income from assets set aside to meet current pensions (section 295-385 of ITAA 1997); and · income from other assets used to meet current pensions (section 295-390 of ITAA 1997). This exemption does not apply to income from assessable contributions and non-arm's length income. | Detailed Reasoning - Income from assets set aside to meet current pensions: A complying superannuation fund is exempt from tax on income from assets set aside solely to meet current pension liabilities, that is, income from segregated current pension assets. A superannuation fund has segregated assets if it has: · set aside certain assets so that the income from these assets can be specifically identified as having the sole purpose of paying a superannuation income stream benefit; and · obtained an actuarial certificate (if needed) o before the date of lodgement of the superannuation fund's annual return for the income year; and o which verifies that the assets and earnings that the actuary expects will be made from those assets are sufficient to pay, in part or in full, the benefit liabilities when they are due. An actuarial certificate will not be required if: · the superannuation fund claims the tax exemption using the segregated assets method, and · the superannuation fund paid allocated pensions, market-linked pensions or account-based pensions at all times during the income year. In this case you advised that there are X members in the Fund and that they are in pension phase in the relevant income year. You also advised that the assets are segregated and the pensions are account based pensions. As the Fund is in pension phase in the relevant income year, the Fund is entitled to the ECPI exemption for the whole of the relevant income year. | Detailed Reasoning - Taxation of pension payment: Subdivision 301B of the ITAA 1997 sets out the taxation arrangements that apply to superannuation benefits received by members of complying superannuation funds, etc. Superannuation benefits includes a superannuation lump sum or a superannuation income stream. This treatment varies depending on the age of the member when they receive the benefit. The rate of tax on a super income stream will depend on whether a taxpayer is under or above preservation age, and whether the income stream is element taxed. If a recipient is age 60 or above, and is element taxed in the fund, section 301-10 of the ITAA 1997 provides the income stream is not assessable and not exempt income. If a recipient is age 60 or above, and is element untaxed in the fund, the income stream is taxed at marginal rates, with a 10% tax offset. Generally a taxpayer must reach preservation age before he/she can access their superannuation. This is 55 years of age for persons born before 1 July 1960. The member's preservation age is 55 and will be above their preservation age when they will be paid a pension amount from the Fund. As the member is over 60 years of age when they will be paid a pension from the Fund, the income stream is not assessable and not exempt income to the member.