Issue raised
Does an SMSF lose the pension asset exemption on assets used to support the payment of a transition-to-retirement pension where the member draws down more than 10% (that is, the maximum amount) of the relevant account balance during the income year?
Background information
It has come to our attention that some SMSFs are inadvertently making pension payments to members of the fund which exceed the maximum pension draw down amount of 10% (as required in the case of a transition to retirement pension). In these circumstances, it is acknowledged that some SMSF trustees will have breached the pension and payment standards where this occurs and this will be reported in an Auditor/Actuary Contravention Report.
However, the broader issue that needs to be resolved is whether the assets of the fund which are supporting the payment of the transition-to-retirement pension retain their income tax and capital gains tax (CGT) exemption.
That is, does the SMSF lose the pension asset exemption (whether segregated or unsegregated) where the trustees of the fund make payments which exceed the 10% maximum pension draw down amount?
Industry view / suggested treatment
From a technical perspective, the main references in this regard relate to the pension asset exemption provisions (being section 295-385 and section 295-390) and there does not appear to be much guidance in catering for this issue in these provisions.
Furthermore, the National Tax and Accountants Association (NTAA) were unable to identify any ATO IDs, rulings or other public determinations which provided guidance on this issue.
In fact, the only reference to a similar issue related to the ATO's view on an SMSF claiming the pension exemption in circumstances where the trustees of the fund failed to make the minimum pension payment for an income year. In this regard, the ATO concluded that the pension standards are very specific rules and if a fund fails to comply with these rules then the pension asset exemption is lost. In other words, a fund which fails to make minimum pension payments during an income year loses the pension asset exemption for assets 'notionally' supporting the payment of the pension. Reference should be made to the NTLG Superannuation sub-committee minutes of meeting dated 8 September 2009.
Technical reference
Section 295-385, section 295-390 of the Income Tax Assessment Act 1997 (ITAA 1997) and Superannuation NTLG sub-committee dated 8 September 2009
Impact on clients
Unknown at this stage
Priority of issue where ATO view is required
Medium
ATO initial response
Yes. The query simply provides another example of a circumstance in which the relevant Superannuation Industry (Supervision) Regulation 1994 (SISR) pension standards may not be met in an income year. In this regard the general principle that the current pension income exemption is available only where the relevant SISR pension standards have been met in both form and effect, set out in the ATO's response at agenda item 6.1 of the 8 September 2009 meeting of the NTLG Superannuation Technical Sub-group, applies equally to this query.
There is no specific scope within the definition of 'transition to retirement income stream' in regulation 6.01, or in subregulations 1.06(1) and 1.06(9A) of the SISR for the definition of pension to be met where the relevant payment requirements have been breached.
There may be some administrative scope for the Commissioner to consider that the pension definition has been met where the relevant breach arises from circumstances that are completely outside of the trustee's control. However, this could only be considered on a case by case basis in the light of the specific facts and circumstances of each particular case.
Meeting discussion
The chair summarised the question and the ATO's initial response and invited the member who submitted the question to comment.
Members accepted that the ATO's initial response was legally correct but expressed the view that it may potentially have harsh practical implications.
A member asked if this issue was to be considered in the draft tax ruling on superannuation income streams. The ATO confirmed that the relevant legislative provisions would be considered in the ruling but, because of the nature of a tax ruling, any administrative arrangements which might be formulated in respect of minor errors made by the trustee would not be considered. It would be more appropriate to deal with administrative aspects in a practice statement.
In the course of some general discussion on the policy behind the current rules and the practical administrative problems they present members, funds and advisors, it was considered whether the issue could be referred to Treasury for legislative change using TIES. It was agreed that this was not a suitable issue to go on TIES. (TIES may be used for care and maintenance of the tax and superannuation systems via an online form. It is focussed is on correcting technical or drafting defects, removing anomalies, and addressing unintended outcomes.) The chair noted, however, that Treasury, as a standing member of the NTLG, would be made aware of external members' concerns on the issue through the meeting minutes. It was also suggested that external members could consider raising this with Treasury directly.
Sections within 7. Technical questions raised by members
Last Modified: Friday, 4 February 2011