Private ruling: Exempt current pension income
Published: March 2013
Ruling period: 2011-12 income year
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the fund entitled to claim exempt current pension income in the 2011-12 income year? | A1: No.

Relevant facts and circumstances: The superannuation fund is a self managed superannuation fund (the Fund). The Fund has X members. The X members are between 55 and 60 years of age. The Fund has Y accounts with a bank, designated account (Account 1) and a designated account (Account 2). Each account within the Fund has completely separate numbers for share investments and bank accounts for tracking income and expenses in each. On a specified date the trustees drew a cheque from Account 1. The cheque was made out to the beneficiaries. The Fund intended the amount to be a particular type of payment that met the minimum required. A bank statement confirmed that a cheque was drawn during the relevant income year by the Fund from Account 1, and the account was debited by the intended payment. On the day the cheque was drawn from Account 1 the beneficiaries deposited that same cheque into Account 2. A bank statement confirmed that a cheque was deposited on the same date during the relevant income year to Account 2, and the account was credited by the intended payment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-385 | Income Tax Assessment Act 1997 Subsection 295-385(1) | Income Tax Assessment Act 1997 Subsection 295-385(3) | Income Tax Assessment Act 1997 Paragraph 295-385(3)(b) | Income Tax Assessment Act Regulations 1997 Regulation 295-385.01 | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06(1) | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06(9A)

Reasons for decision: Summary: The Fund is not entitled to claim exempt income in the relevant income year because the payment had ceased. | Detailed Reasoning - Exempt current pension income: Subdivision 295F of the Income Tax Assessment Act 1997 (ITAA 1997) operates to exempt from tax the income of a superannuation fund earned from assets that are used to finance current pensions. There are different methods which a trustee of a fund may use to determine the amount of income that is exempt from income tax, depending on the circumstances of the particular case. | Detailed Reasoning - Segregated current pension assets: Under subsection 295-385(1) of the ITAA 1997, 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. Subsection 295-385(3) of the ITAA 1997 provides that assets are segregated current pension assets if: (a) the assets are invested, held in reserve or otherwise being dealt with at that time solely to enable the fund to discharge all or part of its liabilities (contingent or not) in respect of superannuation income stream benefits that are payable by the fund at that time; and (b) the trustee of the fund obtains an actuary's certificate before the date for lodgement of the fund's income tax return for the income year to the effect that the assets and the earnings that the actuary expects will be made from them would provide the amount required to discharge in full those liabilities, or that part of those liabilities, as they fall due. This means that assets are current segregated pension assets only when they are held or invested for the sole purpose of discharging current pension liabilities of the fund. The assets must be clearly identified as the assets dedicated to funding the superannuation income stream benefit and there is a clear relationship established between the relevant assets and the member's account. The trustee of the fund must obtain, before the date of lodgement of the income return for the relevant income year or such later time as allowed, an actuarial certificate under paragraph 295-385(3)(b) of the ITAA 1997 that provides the extent to which the segregated assets are able to meet liabilities relating to the superannuation income stream benefits. However, since 1 July 2004, the requirement for complying funds to obtain an actuarial certificate is not required if a fund is paying pensions as prescribed in the regulations and no other type of pension. The prescribed pensions [regulation 295-385.01 of the Income Tax Assessment Act Regulations 1997 (ITAR)] are: · account-based pensions; · allocated pensions; and · market linked pensions. | Detailed Reasoning - Segregation of pension assets: Whether or not assets have been appropriately segregated is a question of fact. The legislation does not specify how this is to be done. If a number of separate bank accounts were established by a Fund, the cash in one of these accounts could be a segregated asset. It is the responsibility of the trustee of the superannuation fund to clearly and unambiguously specify which assets have been set aside exclusively to fund pensions. From the facts of the case, the superannuation fund (the Fund) is a self managed superannuation fund. The Fund has two separate accounts with a bank; including designated account (Account 1) and a designated account (Account 2). During the relevant income year, the trustees of the Fund drew a cheque from Account 1. The cheque was made out to the beneficiaries. On the day the cheque was drawn from Account 1, the beneficiaries deposited that same cheque into Account 2. The Fund intended the amount to be a payment that met the minimum required. However, it is considered that the trustee of the Fund has not made a payment to the beneficiaries as the funds comprising the payment did not actually leave the fund. A cheque was drawn from Account 1, and while it was made out to the beneficiaries, the cheque was deposited into Account 2, on the same day, and not into the member's personal bank account. As Account 1 and Account 2 are both accounts that belong to the Fund, it is considered that the monies have merely been transferred from one account to another account within the Fund and, therefore, no payment has been made by the Fund. A superannuation income stream, such as pension payments, must meet the requirements of subregulation 1.06(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR 1994) and the requirements of subregulation 1.06(9A) of the SISR 1994. Subregulation 1.06(9A) of the SISR 1994 requires that a payment is made at least annually and ensure that the other requirements as outlined in the subregulation are met. Under one of the requirements the superannuation fund must make a minimum payment amount as calculated under clause 1 of Schedule 7 of the SISR 1994. If a superannuation income stream fails to meet the above requirements in an income year, the superannuation income stream will be taken to have ceased at the start of that income year for income tax purposes. As discussed above, it has been determined that the Fund has not made a minimum annual payment to the beneficiaries in the relevant income year, the Fund's superannuation income streams will be taken to have ceased at the start of the relevant income year for income tax purposes. As the superannuation income streams are taken to have ceased at the start of the relevant income year, the Fund is not eligible to claim exempt current pension income in the relevant income year. | Detailed Reasoning - Further information for you to consider: As it has been determined that no pension payment has been made to the beneficiaries, the beneficiaries do not have to include the amount in their income tax returns for the relevant income year.