Private ruling: Transfer balance cap and exempt current pension income
Date of advice: 4 April 2018
Published: June 2018
Ruling period: Income year ending 30 June 20XX | Income year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is a person (the Deceased), the sole member of the Self-Managed Superannuation Fund (the Fund) required to comply with the transfer balance cap if they died before 1 July 2017? | A1: No | Q2: If so, does the Executor of the E state have the authority to approve the commutation back to accumulation in the Fund for the deceased member? | A2: Not applicable | Q3: If the transfer balance cap applies, can the Executor choose to apply CGT relief even though the deceased member’s pension is taken to have ceased on their date of death? | A3: Not applicable | Q4: If the transfer balance cap does not apply, is the Fund entitled to claim exempt current pension income based on the original pension balances? | A4: Yes

Relevant facts and circumstances: The Deceased died before 1 July 20XX. Several months later, the Supreme Court issued a grant of probate to a person (the Executor). At the time of their death, the Deceased had not yet determined how they would comply with the transfer balance cap, which would commence on 1 July 2017. The Deceased was the sole member of the Fund. The Deceased had pension accounts which were valued at over $xxx. These pensions were not reversionary pensions. A company (the Company) is the trustee of the SMSF. The Deceased was the sole director of the Company. The Deceased’s binding death benefit nomination requires the death benefit to be cashed out to their Estate. Since the Deceased’s death, the Executor of the Deceased’s Estate has been the director of the Company. The Deceased does not have any dependants and the entire estate is to be paid to a single person. The Executor was required to arrange for a commercial property and other shareholdings to be sold before any payments could be made. Shortly after the probate was obtained, an interim distribution was made by the Fund. All shareholdings were sold in July 20XX. Several months later, the Beneficiary signed the Contract of Sale of Real Estate. The sale of the property took some time as the Executor needed to arrange a market valuation and the Beneficiary needed to arrange their own finance. The Executors are awaiting the finalisation of the SMSF before they make the final distribution.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 294 | Income Tax Assessment Act 1997 section 294-15 | Income Tax Assessment Act 1997 subsection 294-20(1) | Income Tax Assessment Act 1997 Subdivision 295-F | Income Tax Assessment Regulations 1997 regulation 995-1.01 | Income Tax Assessment Regulations 1997 subregulation 995-1.01(3)

Reasons for decision: Summary: As the Deceased died prior to 1 July 2017, the SMSF is not required to comply with the transfer balance cap. | Detailed Reasoning - Transfer balance cap: Pursuant to Division 294 of the Income Tax Assessment Act 1997 the transfer balance cap is a cap on the total amount that a person may transfer into the retirement phase of superannuation. | Detailed Reasoning - Transfer balance account: Pursuant to section 294-15 of the ITAA 1997, a person commences to have a transfer balance account if they have, at any time, been the recipient of a superannuation income stream. The transfer balance account commences on the later of 1 July 2017 or the day that a person first starts to be a retirement phase recipient of a superannuation income stream. Subsection 294-20(1) of the ITAA 1997 state that a person is a retirement phase recipient of a superannuation income stream at a time if they have a superannuation income stream in the retirement phase at that time and a superannuation income stream benefit is payable at that time. Taxation Ruling 2013/5 Income Tax: When a superannuation income stream commences and ceases discusses superannuation income streams on the death of a member and states at paragraph 29: 29. A super income stream ceases as soon as a member in receipt of a superannuation income stream dies, unless a dependant beneficiary of the deceased member is automatically entitled, under the governing rules of the superannuation fund or the rules of the superannuation income stream, to receive an income stream on the death of the member. If a dependant beneficiary of the deceased member is automatically entitled to receive the income stream upon the member’s death, the superannuation income stream continues. In this instance the Deceased doesn’t have any dependants and the pension was not reversionary. Consequently, the Deceased’s superannuation income stream ceased when the Deceased died prior to 1 July 2017. Therefore the Deceased did not commence a transfer balance account on 1 July 2017 and is not required to comply with the transfer balance cap. | Detailed Reasoning - Question 2: Not applicable | Detailed Reasoning - Question 3: Not applicable | Summary: It is considered that the payments have been made as soon as it was practicable. The Fund has made superannuation income stream benefits and will be able to claim the exclusion for exempt current pension income after the date of death of the sole member. | Detailed Reasoning - Detailed reasoning: Income that a complying superannuation fund derives from assets set aside or used to pay superannuation income stream benefits to members, which would otherwise be assessable income, is deemed to be exempt income where the conditions in Subdivision 295-F of the Income Tax Assessment Act 1997 (ITAA 1997) are satisfied for an income year. Such income is commonly referred to as exempt current pension income (ECPI). The ITAA 1997 defines ‘superannuation income stream benefit’ with reference to the Income Tax Assessment Regulations 1997 (ITAR 1997). The meaning of superannuation income stream benefit is set out in regulation 995-1.01. Subregulations 995-1.01(2) to (5) of the ITAR 1997 expand the meaning of superannuation income stream benefit for the purposes of sections 295-385, 295-390 and 295-395 of the ITAA 1997 which relate to ECPI of a superannuation fund amongst other provisions. In particular, subregulation 995-1.01(3) of the ITAR 1997 states: For the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act, if: (a) a superannuation death benefit that is a superannuation lump sum is paid after the death of a person (the deceased ) using only an amount from a superannuation interest; and (b) immediately before the deceased's death, the superannuation interest was supporting a superannuation income stream payable to the deceased; and (c) the superannuation income stream did not automatically revert to another person on the death of the deceased; the amount paid as the superannuation lump sum, to the extent it is not attributable to any amount (other than investment earnings) added to the superannuation interest on or after the deceased's death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased's death until as soon as it was practicable to pay the superannuation lump sum. Where all the conditions are satisfied, a superannuation fund will continue to be entitled to the earnings tax exemption for a specified period after the death of a member in relation to earnings on an amount that is paid as a superannuation death benefit lump sum. In this case, the sole member of the Fund passed away. Immediately prior to their death the Deceased was receiving an account based pension. On the death of the Deceased, the pension did not automatically revert to another person. The assets in the Fund had to be sold prior to any payments being made. This took some time to finalise as the Beneficiary opted to purchase the commercial property which required them to obtain finance and the Executor to obtain a market valuation. It is considered that the payments have been made as soon as it was practicable. In this case, subregulation 995-1.01(3) of the ITAR 1997 has been satisfied. Therefore, the Fund has made superannuation income stream benefits and will be able to claim ECPI for the 20XX-XX income year under subdivision 295-F of the ITAA 1997.