Private ruling: Exempt current pension income and capital gains tax
Published: March 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: 1. Will the moving of shares, within your self-managed superannuation fund (SMSF), from accumulation phase to the pension phase, trigger a capital gains tax (CGT) event? 2. Is income tax payable by the fund on assets before they are transferred to pension phase? Advice/Answers 1. No. 2. No.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-5 | Income Tax Assessment Act 1997 Section 295-385 | Income Tax Assessment Act 1997 Section 295-390 | Income Tax Assessment Act 1997 Subdivision 295F.

Reasons for decision: Summary: The moving of shares, within your self-managed superannuation fund (SMSF), from accumulation phase to the pension phase, does not trigger a capital gains tax (CGT) event. Income tax is not payable by the SMSF on assets before they are transferred to pension phase. | Detailed Reasoning - Capital Gains Tax (CGT): CGT is the tax that you pay on any capital gain you include on your annual income tax return. It is not a separate tax, merely a component of your income tax. Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss if, and only if, a CGT event happens. CGT events are the different types of transactions or events that may result in a capital gain or capital loss. Many CGT events involve a CGT asset, some relate directly to capital receipts (capital proceeds). You need to know which type of CGT event applies in your situation because it affects how you calculate your capital gain or capital loss and when you include it in your net capital gain or net capital loss. Section 104-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a list of possible CGT events. A superannuation fund moving assets from the accumulation phase to the retirement income phase is not a listed CGT event under section 104-5 of the ITAA 1997. As the transaction is not a CGT event a capital gain or capital loss cannot be made. Accordingly, so long as the Fund's trust deed permits the payment of pensions, no CGT is payable on the fund's assets (shares) at the time of the transition from the accumulation to retirement phase. | 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. The exempt current pension income exemption can be claimed by all complying superannuation funds including self managed superannuation funds. There are two methods for working out the amount of exempt current pension income 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) · before the date of lodgment of the superannuation fund's annual return for the income year; and · 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. | Detailed Reasoning - Income from other assets used to aside meet current pensions: If a superannuation fund's assets are not specifically set aside for paying a superannuation income stream benefit, the superannuation fund must determine the amount of ordinary and statutory income that relates to the proportion of fund assets relating to current pensions. The tax exemption is calculated by using the proportion of the superannuation fund's average value of current pension liabilities compared to its average value of super liabilities. A superannuation fund using this calculation method needs to obtain an actuarial certificate that certifies the proportion of income that is exempt. | Detailed Reasoning - Conclusion: Income (including capital gains, interest and dividends) of a fund is brought to account when it is received. The income is not apportioned to the period when the fund is in accumulation phase and when it is in pension phase. It follows, that where a fund is paying its members a pension, its income is wholly exempt from tax under subdivision 295F of the ITAA 1997. Where only some of the assets of the fund are being used to fund member pensions, then only a portion of the funds income, as certified in an actuarial certificate, is exempt from tax. Further, where all of a fund's assets are being used to fund member pensions for the whole income year then all of its income, other than assessable contributions and non-arm's length income, is exempt from tax. You intend to commence a transition to retirement plan. Assets being used to fund that plan is exempt from tax.

Relevant facts: You are both the trustee and sole member of a self managed superannuation fund (the Fund). | The Funds is comprised of cash and shares. | The cash and shares concerned were all earned and invested for around X years.