Edited version of private ruling

Authorisation Number: 1011542702113

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Ruling

Subject: Superannuation benefits

1. Is the investment income of the Superannuation Fund assessable under subsection 295-545(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Are the superannuation benefits you receive from the Superannuation Fund non-assessable and non-exempt income according to section 301-10 of the ITAA 1997?

Yes.

This ruling applies for the following period

1 July 2010 to 30 June 2011.

The scheme commenced on

1 July 2010.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are over 75 years of age.

You have been receiving a Defined Benefit (DB) pension

You commuted a percentage of the DB pension over 20 years ago, on which you state you were subject to tax.

You state you placed this commuted taxed amount into a qualifying Approved Deposit Fund (ADF). After a name change it became an ADF Super/Rollover Plan.

You have recently established a self managed superannuation fund (SMSF).

The ADF Super/Rollover Plan confirmed in a letter the rollover of your redemption of the proceeds of your account to the SMSF's bank account.

Later, the SMSF transferred some of the money in the bank account to a Term Deposit with another bank for the SMSF.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 295-95(2).

Income Tax Assessment Act 1997 Subsection 280-20(2).

Income Tax Assessment Act 1997 Section 295-545.

Income Tax Assessment Act 1997 Subsection 295-545(1).

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 307-70.

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Rates Act 1986 Section 29.

Income Tax Regulations 1997 Regulation 995-1.01.

Reasons for decision

Summary

Any revenue derived from investments made by the SMSF is assessable income to the SMSF while it is in the investment phase. The interest on the term deposit should be included in the SMSF's income tax return for the income year when it was received.

As you are over 60 years of age, any superannuation benefit you subsequently receive from your SMSF will then be non-assessable and non-exempt income.

Detailed reasoning

Outline of the taxation regime for superannuation entities

Superannuation funds (fund) and ADFs are taxed essentially according to the same principles as companies and individuals as provided by the ITAA 1997 and Income Tax Assessment Act 1936 (ITAA 1936). This is generally the case in relation to the calculation of taxable income. This means that unless specific provisions apply to the contrary:

· if an amount is income under ordinary concepts (for example, interest), it will also be assessable income for a fund or ADF

· if an amount is specifically included as income by virtue of a provision that is applicable to taxpayers in general, it will also be assessable income for a fund or ADF where the provisions are applicable to the fund or ADF

· if an amount is specifically excluded from income by virtue of a provision that is applicable to taxpayers in general, it will also be excluded from assessable income for a fund or ADF where the provisions are applicable to the fund or ADF

· if an amount is calculated as an assessable capital gain by virtue of a provision that is applicable to taxpayers in general, it will also be assessable income for a fund or ADF where the provisions are applicable to the fund or ADF, and

· if an amount is not included in assessable income in any of the above circumstances for a taxpayer in general, the amount will not be included in assessable income for a fund or ADF.

Annual returns and tax returns

In each year of income, a superannuation entity that is regulated under the SIS Act is required to lodge a regulatory annual return with APRA or, if the entity is a SMSF, with the ATO.

Most superannuation entities are also required to lodge an income tax return with the Commissioner of Taxation each year.

Taxation specific to superannuation entities

Division 295 of the ITAA 1997 modifies the effect of the general taxation principles as they apply to funds. This division brings into assessable income certain contributions and exempts certain investment income.

Essentially, Division 295 of the ITAA 1997 provides for the concessional tax treatment for funds which comply with the conditions specified in the SIS Act and its Regulations. A fund or ADF which complies with these conditions is subject to tax at the concessional rate on its income - including certain contributions received, investment income and realised capital gains.

The tax calculated under Division 295 is payable by the trustee of the entity. The trustee of a superannuation fund or ADF means:

· if there is a trustee (within the ordinary meaning of that expression) of the fund or trust - the trustee, or

· the person who administers the fund or trust.

The taxable income of a superannuation entity is calculated as if the trustee were a resident taxpayer. This means that the fund is taxed on its income in Australia and also on its income which has a source outside Australia. As applies to other taxpayers, a credit will be allowed for foreign tax paid on the income which has its source outside Australia.

Section 295-545 classifies the components of taxable income for complying superannuation funds and complying ADFs as follows:

295-545(1)

The taxable income of these entities is split into a *non-arm's length component and a low tax component:

· complying superannuation funds;

· complying approved deposit funds;

· pooled superannuation trusts.

295-545(2)

The non-arm's length component for an income year is the entity's *non-arm's length income for that year less any deductions to the extent that they are attributable to that income.

295-545(3)

The low tax component is any remaining part of the entity's taxable income for the income year.

When, as it is in your case, the fund is the investment phase under subsection 280-20(2) of the ITAA 1997:

Earnings on the investment of amounts in a superannuation plan are assessable income of the superannuation provider.

Rates of tax

A complying superannuation fund, complying ADF or ADF is taxed at a concessional rate of 15% on the low tax component of its taxable income and at 45% on the non-arm's length component of its taxable income. A non-complying superannuation fund or ADF is taxed at 45% on all of its taxable income

Additional tax is imposed on the no-TFN contributions income of a complying superannuation fund at 31.5% and of a non-complying superannuation fund at 1.5% (section 29 Income Tax Rates Act 1986).

Complying funds can take full advantage of any franking credits in respect of Australian dividends even though they do not pay tax at the full rate. However, even where a fund complies with the conditions for concessional tax treatment, it must pay tax at the rate of 45% on its "non-arm's length income" (such as non-arm's length income, private company dividends and certain trust distributions).

A fund which does not comply with the prescribed conditions for a complying superannuation fund is taxed as a non-complying fund at the tax rate of 45% on its income. Income includes certain contributions received by the fund and realised capital gains.

Taxation of member benefits

The tax treatment of a superannuation benefit received by a taxpayer from a complying superannuation plan as from 1 July 2007 under Division 301 of the ITAA 1997 may vary depending on:

· whether the benefit is a superannuation lump sum

· a superannuation income stream

· the age of the member when the benefit is received

· the components of the superannuation benefit, (tax-free component or taxable component)

· whether the superannuation benefit contains an element untaxed in the fund, and

· the amount of the benefit (where relevant caps apply).

Superannuation lump sum is defined in section 995-1 of the ITAA 1997 as follows:

superannuation lump sum has the meaning given by section 307-65.

The meaning of superannuation lump sum under section 307-65 of the ITAA 1997 is:

A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (see section 307-70).

A superannuation income stream and superannuation income stream benefit is defined in section 307-70 of the Income Tax Assessment Act 1997 (ITAA 1997) as:

A superannuation income stream benefit is a superannuation benefit specified in the regulations that is paid from a superannuation income stream.

A superannuation income stream has the meaning given by the regulations.

Under regulation 995-1.01 of the Income Tax Regulations 1997 (ITR 1997) a 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.

Member aged 60 or over

From 1 July 2007, all superannuation benefits received by a person when he or she is aged 60 or over (either as a superannuation lump sum or as a superannuation income stream, including pensions commenced before 1 July 2007) are tax-free (ie non-assessable non-exempt income) where the benefits are paid from a taxed source (section 301-10 of the ITAA 1997).

However, if you do receive an untaxed benefit from any superannuation fund it would be taxed as follows:

Summary of tax treatment of your superannuation benefits

As monies rolled into your SMSF have been taxed prior to being rolled over and your SMSF will be remitting 15% tax on all income derived from investments, any benefits paid from your SMSF will be from a taxed source. This means all benefits paid to you from the SMSF, either as a lump sum or pension will be non-assessable and non-exempt income.

You are no longer required to include these superannuation lump sums and income streams in your individual tax returns. Basically, this means that tax-free superannuation benefits are not counted in working out the tax payable on any other assessable income.

In addition, tax-free superannuation benefits are not counted in determining whether you can claim the low income tax offset.

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