Private ruling: Superannuation benefits
Date of advice: 18 November 2015
Published: February 2016
Ruling period: Income year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: 1. Is the Taxpayer, who is under 60 years of age and in receipt of a death benefit pension, entitled to the tax offset under section 302-75 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to a new pension which results from the death benefit pension being commuted to a lump sum which is rolled to a self-managed superannuation fund (SMSF) from which the new pension immediately commences. 2. Is the lump sum that would be rolled-over from the original superannuation fund to the SMSF to be included in the SMSF's assessable income? | A1: 1. No 2. Yes, only to the extent that it consists of an element untaxed in the fund and is not an excess untaxed roll-over amount for the Taxpayer.

Relevant facts and circumstances: The Taxpayer is under 60 years of age and a widow. The Taxpayer's spouse (the spouse) died under age 60 several years ago. The spouse was a member of a superannuation fund (Fund A). Fund A is not a SMSF. Upon the death of the spouse, the trustee of Fund A cashed the deceased spouse's benefits by way of commencement of a pension (superannuation income stream) in favour of the Taxpayer. The Taxpayer has been in receipt of the superannuation income stream from Fund A for several years. For various commercial reasons the Taxpayer is dissatisfied with Fund A and wishes to: • instruct the trustee of Fund A to commute the existing pension; • instruct the trustee of Fund A to roll the lump sum that results from the commutation to a self-managed superannuation fund (Fund B) and ; • with the benefits in Fund B, immediately commence a new pension from Fund B.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 295-190 | Income Tax Assessment Act 1997 section 302-75 | Income Tax Assessment Act 1997 section 306-10 | Income Tax Assessment Act 1997 paragraph 306-10(a) | Income Tax Assessment Act 1997 subsection 307-5(1) | Income Tax Assessment Act 1997 subsection 307-5(3) | Income Tax Assessment Act 1997 paragraph 307-5(3)(c) | Income Tax Assessment Act 1997 subsection 307-5(3A) | Income Tax Assessment Act 1997 section 307-15 | Income Tax Assessment Act 1997 section 307-65 | Income Tax Assessment Act 1997 section 307-275

Reasons for decision: Summary: The Taxpayer's death benefit income stream will cease at the time of the commutation of her superannuation income stream entitlements into an entitlement to a lump sum prior to the roll-over. This is because it is not possible to directly roll-over superannuation income stream benefits. The superannuation benefit that arose from the commutation of the Taxpayer's superannuation death benefit income stream is a superannuation member benefit due to the operation of subsection 307-5(3) of the ITAA 1997. The Taxpayer will not be entitled to claim the 15% tax offset in relation to any taxable component of the income stream that the Taxpayer intends to receive from the rolled-over superannuation benefit. | Detailed Reasoning - Roll-over superannuation benefit: The definition of a roll-over superannuation benefit is outlined in section 306-10 of the ITAA 1997. According to the legislation: A superannuation benefit is a roll-over superannuation benefit if: (a) the benefit is a superannuation lump sum and a superannuation member benefit; and (b) the benefit is not a superannuation benefit of a kind specified in the regulations; and (c) the benefit satisfies any of the following conditions: (i) it is paid from a complying superannuation plan; (ii) it is an unclaimed money payment; (iii) it arises from the commutation of a superannuation annuity; and (d) the benefit satisfies any of the following conditions: (i) it is paid to a complying superannuation plan; (ii) it is paid to an entity to purchase a superannuation annuity from the entity. (emphasis added) This means that unless a superannuation benefit is a superannuation lump sum, it cannot be a roll-over superannuation benefit and so cannot be rolled over from one fund to another. The definition of a superannuation lump sum is provided in section 307-65 of the ITAA 1997, which states that: A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (see section 307-70) This therefore means that the benefits from a superannuation income stream cannot be rolled over from one fund to another without first commuting the entitlement to future benefits into an entitlement to a lump sum. The Commissioner's views on when a superannuation income stream has ceased is discussed in Taxation Ruling TR 2013/5 (TR 2013/5) entitled ' Income Tax: when a superannuation income stream commences and ceases.' Relevantly, paragraphs 23 and 24 state that: 23. A superannuation income stream ceases when a request from a member or a dependant beneficiary to fully commute their entitlements to future superannuation income stream benefits for an entitlement to a lump sum takes effect. 24. A request to fully commute a superannuation income stream takes effect as soon as the trustee's liability to pay periodic superannuation income stream benefits to the member or a dependant beneficiary is substituted with a liability to pay that member or dependant beneficiary a superannuation lump sum. In the Taxpayer's case, a roll-over from Fund A to Fund B means that the Taxpayer will commute their future income stream entitlements into an entitlement to a lump sum prior to the roll-over. In turn, the fact that the commutation will take place will result in the Taxpayer's death benefit income stream ceasing. | Detailed Reasoning - Superannuation member benefit: The lump sum payment that will arise from the commutation of the Taxpayer's superannuation income stream entitlements is a superannuation benefit. Superannuation benefits can be split into two types: superannuation member benefits and superannuation death benefits. The characteristics of these two types of benefits are outlined in subsection 307-5(1) of the ITAA 1997. But for the application of subsection 307-5(3) of the ITAA 1997, the superannuation lump sum would be a superannuation death benefit as it is a payment described in column 3 of item 1 of the table in subsection 307-5(1). This is because the payment would be: • taken to be made to, or received by, the Taxpayer by virtue of section 307-15 of the ITAA 1997 because the payment would be made for the Taxpayer's benefit (and also at the Taxpayer's direction or request); and • made from 'a superannuation fund, after another person's death, because the other person was a fund member. However, the effect of subsection 307-5(3) of the ITAA 1997, if its various requirements are satisfied, is to treat the superannuation benefit to which it applies as a superannuation member benefit rather than as a superannuation death benefit (which it would be apart from that subsection). According to subsection 307-5(3) of the ITAA 1997: (3) A superannuation benefit is also a superannuation member benefit if: (a) the superannuation benefit arises from the commutation of a superannuation income stream; and (b) it would be a superannuation death benefit apart from this subsection; and (c) the benefit is paid after the latest of the following: (i) 6 months after the death of the deceased person; (ii) 3 months after the grant of probate of that deceased person's will or letters of administration of that deceased person's estate; (iii) if the payment of the benefit is delayed because of legal action about entitlement to the benefit--6 months after the legal action ceases; (iv) if the payment of the benefit is delayed because of reasonable delays in the process of identifying and making initial contact with potential recipients of the benefit--6 months after that process is completed; and (d) the Commissioner has not made a decision about the benefit under subsection (3A). Subsection 307-5(3A) of the ITAA 1997 outlines two scenarios where the Commissioner may make a decision in writing that the superannuation benefit in question is not a superannuation member benefit. The scenarios outlined are situations where the payment of the benefit has been delayed due to legal action or due to delays in the process of identifying and making initial contact with potential recipients. In the Taxpayer's case, there was no legal action and there were no delays in the process of identifying and making initial contact with potential recipients. According to the facts of the case, the roll-over to the Fund is intended to occur in the 2016 financial year while the Deceased passed away several years ago. As the superannuation benefit also satisfies the other requirements in subsection 307-5(3) of the ITAA 1997 , the lump sum superannuation benefit is a superannuation member benefit. It should also be noted that if a superannuation benefit is a superannuation death benefit rather than a superannuation member benefit, then it cannot be rolled over. This is because paragraph 306-10(a) of the ITAA 1997 states that in order to be a roll-over superannuation benefit, the benefit must be 'a superannuation lump and a superannuation member benefit.' In other words, once the roll roll-over has occurred, then the superannuation benefit in question can no longer be a death benefit. | Detailed Reasoning - Inclusion in assessable income: Upon the Taxpayer commuting the income stream in Fund A, the death benefit income stream ceases and becomes a superannuation lump sum. Provided the other relevant requirements in section 306-10 of the ITAA 1997 are satisfied, the superannuation lump sum can be rolled over from Fund A to Fund B as a roll-over superannuation benefit. Subsection 295-190(1) of the ITAA 1997 shows at Item 2, which is relevant in the Taxpayer's case, that Fund B's assessable income would include: A roll-over superannuation benefit that an individual is taken to receive under section 307-15 to the extent that: (a) it consists of an element untaxed in the fund; and (b) is not an excess untaxed roll-over amount for that individual. In relation to section 307-15 of ITAA 1997 it sets out the conditions for a payment to be regarded as being made for the benefit of a person or at the person's request. As the commutation of the income stream in Fund A fund would be made at the Taxpayer's request and the benefit would be rolled over into Fund B for the benefit of the Taxpayer, the benefit would meet the definition as being a payment under this section. In view of the above, the roll-over superannuation benefit would be assessable income of Fund B only to the extent that it consists of an element untaxed and is not an excess untaxed roll-over amount for the Taxpayer. | Detailed Reasoning - Superannuation income stream - taxable component tax offset: Section 302-75 of the ITAA 1997 sets out the requirements for a 15% offset with respect to the taxable component of a superannuation income steam benefit . Subsection 302-75(1) of the ITAA 1997 specifically states: The *taxable component of a *superannuation income stream benefit that you receive because of the death of a person of whom you are a *death benefits dependant is assessable income if: (a) you are under 60 when you receive the benefit; and (b) the deceased died aged under 60. In the Taxpayer's case, as previously discussed, the roll-over superannuation benefit to Fund B represents a superannuation member benefit and would no longer be a death benefit as a result of the commutation. Accordingly, the Taxpayer will not be entitled to claim the 15% tax offset in relation to any taxable component of the income stream that the Taxpayer intends to receive from the rolled-over superannuation benefit.