APRA funds-starting and stopping a super income stream (pension)
This information only applies to taxed, complying super funds which started a super income stream in the form of an account-based pension on or after 1 July 2007. The general powers of administration concession also applies from 1 July 2007.
Super income stream
A super income stream includes an income stream that is a pension according to the Superannuation Industry (Supervision) Regulations (SIS Regulations).
An income stream cannot be a pension in accordance with the SIS Regulations unless it meets two fundamental requirements – that:
- payment occurs at least annually
- for an account-based pension, a minimum amount is paid to the member each year.
We use the term:
- 'pension' when referring to the operation of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or SIS Regulations
- 'super income stream' when referring to the operation of income tax laws.
A super income stream exists when all of the following apply:
- a member is entitled to a series of payments that relate to each other
- the payments are periodic, whether paid annually or more frequently
- the payments are made over an identifiable period of time
- the minimum payment standards of the SIS Regulations have been met.
A liability to make a single payment is not a series of payments and will not meet the requirement of being a super income stream. While there must be continuing liability, a super income stream may stop after only one payment.
Running a super income stream
Once an account-based pension starts, there is an ongoing requirement for you, as trustee, to meet the minimum pension standards in the SIS Regulations.
If any of the requirements of the SIS Regulations are not met in an income year, both of the following apply:
- a super income stream stops for income tax purposes
- you are taken not to have been paying an income stream at any time during the income year.
What are the tax implications for the fund once you start paying a super income stream to a member?
Once a complying super fund starts to pay a super income stream it may be entitled to exempt a portion of the income earned from the fund's assets until such time as the pension stops. This is referred to as 'exempt current pension income' (ECPI).
ECPI does not include assessable contributions or non-arm's length income.
What if you don't meet the minimum pension requirements under the SIS Regulations?
If a fund doesn't meet the minimum pension payment requirements for an account-based pension in an income year, the super income stream will have been taken to have stopped at the start of that income year for income tax purposes.
From the start of the income year, the account is no longer supporting a super income stream and any payments made during the income year will be super lump sums for both income tax and SIS Regulations purposes.
This is the case even if the member remains entitled to receive a payment from the fund for the pension under the governing rules or under general trust law concepts.
This means the fund will not be entitled to treat income or capital gains as ECPI for the income year.
What if you didn't meet the minimum pension payments in one income year but in the subsequent year meet the minimum pension requirements as required under the SIS Regulations?
If the relevant rules are again complied with in the following income year, this results in the start of a new pension. You will need to revalue assets at market value and recalculate the minimum pension payment required at the start of that income year.
When would we exercise our general power of administration to allow an APRA-regulated fund to continue to claim ECPI, even though the minimum pension standards in the SIS Regulations have not been met?
If the total payments in an income year to a member are less than the minimum payment amount for a super income stream, we may exercise our general power of administration (GPA) to allow the fund to continue to claim ECPI if all of the following conditions are met:
- you didn't pay the minimum pension amount in that income year because of either
- an honest mistake you made resulting in a small underpayment of the minimum payment amount for a super income stream
- matters outside your control
- the entitlement to the ECPI exemption would have continued but for you not paying the minimum payment amount
- when you became aware that the minimum payment amount was not met for an income year, you make a catch-up payment as soon as practicable in the following (current) income year; or treat a payment (intended prior year payment) made in the current income year, as being made in that prior income year
- had you made the catch-up payment in the prior income year, the minimum pension standards would have been met
- you treat the catch-up payment, for all other purposes, as if it were made in the prior income year.
If all of the above mentioned conditions are met:
- the super income stream is taken to have continued and a new pension is not started in the following income year – the proportioning rule does not need to be applied again to determine the tax-free and taxable components
- you can continue to claim an income tax exemption for earnings on assets supporting that pension, notwithstanding the fund not meeting its obligations under super law
- any payments made to the member during that income year are treated as super income stream benefit payments (that is, pension payments) and not super lump sums.
If the circumstances of the underpayment do not meet all of the conditions set out above, the exercise of the GPA would not be relevant.
What do we consider to be a 'small' underpayment?
We consider a small underpayment to be one that does not exceed one-twelfth of the minimum pension payment in the relevant income year.
What do we consider to be 'as soon as practicable'?
Generally, if the underpayment is due to an honest trustee error, we consider 'as soon as practicable' to be within 28 days of you becoming aware of the underpayment.
If the underpayment is due to matters outside your control, 'as soon as practicable' is considered to be within 28 days of you being in a position to be aware of the underpayment.
Under what circumstance would we allow you to self-assess your entitlement to the GPA concession?
We allow you to self-assess and apply the GPA concession if all of the following apply:
- not meeting the minimum pension requirements was an honest mistake or was outside your control
- the underpayment is only small (that is, does not exceed one-twelfth of the minimum annual pension payment)
- all of the other GPA conditions have been met.
In all other cases, you must write to us and outline why you did not meet the minimum pension requirements for us to consider the exercise of our general power of administration.
Example 1: You didn't meet the minimum pension requirements for the year ending 30 June due to a transposition error which resulted in a small underpayment
In considering whether the GPA concession would apply, the trustee would need to assess if all of the following apply:
- payments were made during the income year and not meeting the minimum pension payment requirements by 30 June was due to an honest administrative error
- the amount of the underpayment was small
- a catch-up payment was made as soon as practicable, in the following income year.
Based on meeting all of the above conditions, we will allow the trustee to self-assess and apply the GPA concession. Therefore, notwithstanding the fund not meeting its obligations under super law:
End of example
- the super income stream does not stop and a new pension is not started in the following income year
- the trustee continues to claim an income tax exemption for earnings on assets supporting that pension.
Example 2: You incorrectly calculated the minimum pension requirement
The trustee makes an honest administrative error when calculating the minimum pension payment in the relevant income year. The trustee used the incorrect minimum pension payment concession (50% instead of 25%) to calculate the July 2011 pension payment as this was the percentage they had used in the previous year and there was a delay in updating their computer system.
In 2008–09, 2009–10 and 2010–11, the super regulations were amended to reduce the minimum annual pension payment by 50%)
The trustee needs to assess if all the following apply:
- payments were made during the income year and not meeting the minimum pension payment requirements by 30 June 2012 was due to an honest administrative error
- the amount of the underpayment was small
- a catch-up payment was made as soon as practicable, in the following income year (2012–13).
Based on meeting all of the above conditions, we will allow the trustee to self-assess their entitlement to the GPA concession to treat the fund as having continuously paid a super income stream.
End of example
What if you do not meet the conditions to self-assess?
The fund will be treated as not having paid a super income stream for income tax purposes from the start of the income year and; therefore, not be entitled to claim ECPI in that income year if you have not met all of the conditions, as set out above, to self-assess and apply the GPA concession.
Also, the payments to the member made from the fund for that income year are not super income stream benefits and instead should be treated as super lump sums received by the member, for income tax purposes for that income year.
For the following income year, a new super income stream will be taken to have started if the relevant rules are again complied with.
If you think we should further consider your case, you need to outline the relevant circumstances to us in writing.
To ensure a fair and reasonable outcome is achieved in each case, our decision will be made in accordance with the statements and principles set out in the Taxpayers' charter, compliance model and the good decision-making model, which requires that the decision be legal, ethical, overt, sensible, timely and in accordance with the principles of natural justice.
Example 3: Minimum pension payment requirements are not met due to factors outside of the trustee's control
If trustees are unable to make a payment before 30 June for reasons beyond the trustees' control – such as an error or failure on the part of a financial institution – we would consider all the following in determining whether to exercise the GPA to allow the pension to continue:
End of example
- if the trustee would have been entitled to the ECPI exemption but for not paying the minimum payment amount
- if the catch-up amount was made as soon as practicable
- if the circumstances that prevented the trustee from completing the pension payment were out of the trustee's control.
Can you record the underpayment of the pension as an 'accrual' in the accounting records of the fund?
No, for you to meet the minimum pension payment standards you must meet the payment requirements both in form and effect. It is not enough for the rules of the pension to state a payment will be made in each income year if the payment for a particular income year is not actually made.
If you don't make the minimum pension payment in an income year, the pension will be taken to have stopped at the start of that income year for income tax purposes, unless we have exercised the GPA.
This applies even if the member remains entitled to receive a payment from the super fund for the purported income stream under the governing rules or under general trust law concepts and you record the underpayment as an 'accrual' to recognise that liability.
This document provides information about issues you, as trustee of an APRA-regulated fund, may need to take into account when a superannuation income stream starts or stops.