Private ruling: Transition to retirement income streams
Date of advice: 18 November 2016
Published: January 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Can the Taxpayer make an election pursuant to regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (ITAR 1997) and have their superannuation benefit taxed in accordance with section 301-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Taxpayer will be in receipt of benefits from an account-based pension within their self-managed superannuation fund. The superannuation income stream (pension) will commence after the Taxpayer reached preservation age, and is a transition to retirement income stream (TRIS) paid under item 110 of Schedule 1 to the Superannuation Industry (Supervision) Regulations 1994 (SISR). The pension includes a tax free proportion. The pension does not include any unrestricted non-preserved amounts. The conditions under which the Taxpayer’s pension is subject, allow for variation of the amount of the client’s benefit payments. The pension meets the general pension requirements of regulation 1.06 of the SISR and the definition of ‘account based pension’ under subregulation 1.03(1) of SISR. The pension also meets the definition of a ‘transition to retirement income stream’ in subregulation 6.01(2) of the SISR. The limited circumstances listed in regulation 6.01AB of the SISR for commuting a TRIS do not apply and the Taxpayer cannot commute the pension to take cash. The Taxpayer will elect under regulation 995-1.03 of the ITAR 1997 that a forthcoming cash payment should not be treated as a superannuation income stream benefit. In respect of any payment for which an election is made, the Taxpayer will not be commuting any part of the pension, and they will not be requesting a lump sum payment from the trustee of the Fund. The Taxpayer will elect, before each of these payment(s), that regulation 995-1.03 of the ITAR 1997 applies for income tax purposes. The Taxpayer has not previously taken any payments to which the low rate cap amount (per section 307-345 of the ITAA 1997) applies.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-390 | Income Tax Assessment Act 1997 Section 301-20 | Income Tax Assessment Act 1997 Section 307-5 | Income Tax Assessment Act 1997 Section 307-65 | Income Tax Assessment Act 1997 Section 307-70 | Income Tax Assessment Act 1997 Section 307-345 | Income Tax Assessment Regulations 1997 Regulation 995-1.01 | Income Tax Assessment Regulation 1997 Regulation 995-1.03 | Superannuation Industry (Supervision) Regulations 1994 Item 110 of Schedule 1 Superannuation Industry (Supervision) Regulations 1994 Regulation 1.03 | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06 | Superannuation Industry (Supervision) Regulations 1994 Regulation 6.01 | Superannuation Industry (Supervision) Regulations 1994 Regulation 6.01AB

Reasons for decision: Summary: The Taxpayer is able to make an election pursuant to regulation 995-1.03 of the ITAR 1997 prior to the superannuation benefit being paid. Where the election has been made the superannuation benefit will be a superannuation lump sum and taxed in accordance with section 301-20 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 307-5 of the ITAA 1997 sets out amounts which are superannuation benefits. Generally, an amount which is paid to a person from a superannuation fund because they are a fund member is a superannuation benefit by virtue of item 1 in the table in subsection 307-5(1) of the ITAA 1997. A superannuation benefit may be paid, and is taxed, as either a superannuation income stream benefit or a superannuation lump sum benefit. A superannuation income stream benefit is defined under section 307-70 of the ITAA 1997 as a superannuation benefit specified in the regulations that is paid from a superannuation income stream. A superannuation lump sum is defined under section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit. Subregulation 995-1.01(1) of the ITAR 1997 states: superannuation income stream means: (a) an income stream that is taken to be: (i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or (ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or (iii) a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or (b) an income stream that: (i) is an annuity or pension within the meaning of the SIS Act; and (ii) commenced before 20 September 2007. The superannuation income stream meets the definition of pension in regulation 1.06 of the SISR and therefore it satisfies the definition of superannuation income stream in subregulation 995-1.01(1) of the ITAR 1997. The meaning of ‘superannuation income stream benefit’ is provided in subregulations 995-1.01(2) to 995-1.01(5) of the ITAR 1997. Relevantly here, subregulation 995-1.01(2) of the ITAR 1997 provides that a superannuation income stream benefit means a payment from an interest that supports a superannuation income stream other than a payment to which regulation 995-1.03 of the ITAR 1997 applies. This view is stated in paragraph 7 of Taxation Ruling TR 2013/5 ‘ Income tax: when a superannuation income stream commences and ceases ’: Each periodic payment, in a series of periodic payments, made from a superannuation interest that supports a superannuation income stream is a superannuation income stream benefit unless an election under regulation 995-1.03 of the ITAR 1997 has been made for that payment not to be treated as a superannuation income stream benefit. Regulation 995-1.03 of the ITAR states: A payment from an interest that supports a superannuation income stream is not a superannuation income stream benefit if: (a) the conditions to which the superannuation income stream is subject allow for the variation of the amount of the payments of benefit in a year in circumstances other than: (i) the indexation of the benefit under the rules of the product; or (ii) the application of the family law splitting provisions; or (iii) the commutation of the benefit (including commutation to pay a surcharge liability); or (iv) the payment of an assessment of excess contributions tax; and (b) the person to whom the payment is made elects, before a particular payment is made, that that payment is not to be treated as a superannuation income stream benefit. Where the conditions in paragraph 995-1.03(a) of the ITAR 1997 are satisfied a member may elect under regulation 995-1.03 of the ITAR, before a particular payment from the superannuation interest is made, to have that payment not treated as a superannuation income stream benefit for the purposes of the ITAA 1997. The conditions under paragraph 995-1.03(a) of the ITAR 1997 have been, or will be, met. Therefore, provided the superannuation fund is notified of the election before the Benefit is paid, the Taxpayer will be able to make the election. The effect of making the election is that regulation 995-1.03 of the ITAR 1997 excludes the Benefit from being a superannuation income stream benefit and therefore it is a superannuation lump sum as defined in section 307-65 of the ITAA 1997. | Detailed Reasoning - Taxation of superannuation lump sums: Section 301-20 of the ITAA 1997 which sets out the tax treatment of a superannuation lump sum states: (1) If you are under 60 years but have reached your *preservation age when you receive a *superannuation lump sum, the *taxable component of the lump sum is assessable income. (2) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (3) does not exceed 0%. (3) The amount is so much of the total of the *taxable components included in your assessable income for the income year under subsection (1) as does not exceed your *low rate cap amount (see section 307-345) for the income year. (4) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (5) does not exceed 15%. (5) The amount is so much of the total of the *taxable components included in your assessable income for an income year under subsection (1) as exceeds your *low rate cap amount for the income year. *To find definition of asterisked terms, see the Dictionary, starting at section 995-1 As the Taxpayer is over their preservation age and under age 60 they will be entitled to a tax offset under either, or both, subsection 301-20(2) or subsection 301-20(4) of the ITAA 1997 on any superannuation lump sum they receive. Subsection 301-20(2) ensures that the rate of tax is 0% on the taxable component of the superannuation lump sum that does not exceed the Taxpayer’s low rate cap amount (as defined in section 307-345 of the ITAA 1997) and subsection 301-20(4) limits the rate of income tax to 15% on the amount that exceeds the client’s low rate cap amount.