• SMSF News Alert: SMSFs – starting and stopping a pension

    Taxation Ruling 2013/5External Link “Income Tax: when a superannuation income stream commences and ceases” (the Ruling) has been published.

    The Ruling applies to taxed, complying super funds which commence a superannuation income stream in the form of an account-based pension, including a transition to retirement pension, on or after 1 July 2007.

    The Ruling provides information a trustee needs to take into account if paying or considering paying an account-based pension to a member. The Ruling focuses on when a pension commences, and when it ceases, and, consequently, when a pension is payable. These concepts are relevant for trustees in determining:

    • whether the fund can apply the exempt current pension income (ECPI) provisions, and
    • the income tax treatment applicable to payments from the fund, including the correct calculation of the tax-free and taxable components.

    There has been a lot of interest in when a pension ceases – this Ruling now confirms our view. The most common circumstances for a pension ceasing are the following.

    All pension capital is exhausted

    A pension ceases when the capital supporting the pension has been reduced to nil, and the member’s right to have any other amounts applied (other than by way of contribution or rollover) to their superannuation interest has been exhausted.

    Superannuation pension rules have not been complied with

    If a fund fails to meet the pension rules in an income year, as set out in the superannuation laws, the pension will have been taken to have ceased at the start of that income year, including for ECPI purposes.

    For more information on failure to comply with the pension rules, including failure to meet the minimum annual pension amount, refer to Self-managed superannuation funds - starting and stopping a superannuation income stream (pension). This document also includes details on the limited circumstances where the Commissioner of Taxation may apply his powers of general administration (GPA) to allow a pension to continue.

    The pension is fully commuted

    A pension ceases when a member or dependant beneficiary chooses to exchange all of their entitlement to receive future pension benefit payments for a lump sum.

    When commuting a pension, it is important to ensure the minimum annual payment rules are met. To further assist SMSF trustees in understanding how a commutation of a pension is treated when calculating the minimum annual pension amount, we have published a Self Managed Superannuation Fund Determination, SMSFD 2013/2. External Link

    The Determination clearly states that for an account-based pension (other than a transition to retirement pension):

    • a payment resulting from a full commutation cannot count towards the minimum; whereas
    • a lump sum payment made on or after 6 June 2009 from a partial commutation may count towards the minimum annual pension amount if it is not rolled over, or
    • a lump sum payment made before 6 June 2009 from a partial commutation may count towards the minimum annual pension amount if it is rolled over.

    The member has died

    A pension ceases as soon as a member in receipt of the pension dies, unless a dependant beneficiary is automatically entitled to a reversionary pension.

    Recent amendments, applicable to the 2012–13 income year and later income years, ensure that where a member was receiving a pension immediately before their death, the fund will continue to be entitled to ECPI in the period from the member’s death until their benefits are cashed, where the requirements specified in the amendments are met. These amendments require benefits to be cashed as soon as is practicable following the death of the member and, hence, align with existing superannuation laws. For more information, refer to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013External Link.

    The recent amendments also specify a method for calculating the tax-free and taxable components of a super benefit following the death of a pensioner, where the pension did not automatically revert to another person and where the requirements specified in the amendments are met. This proportioning rule applies to a super benefit paid on or after 4 June 2013.

    Further information

    For more information on the issues an SMSF trustee may need to take into account when considering paying a pension, visit Paying benefits from a self-managed super fund.

    End of further information
    • Last modified: 07 Aug 2013QC 36034