Edited version of private ruling

Authorisation Number: 1011771366198

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Ruling

Subject: Taxation of an income stream (PAYG)

Question

Does Division 301 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the superannuation benefit the superannuation fund pays its member?

Advice/Answers

Yes.

This ruling applies for the following periods

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on

1 July 2009

Relevant facts

Your client was born before 1 July 1960.

Your client is a member and trustee of a superannuation (the Fund), a self managed superannuation fund.

Your client turns 60 years of age in the 20XX-XX income year.

The Fund has started to pay your client a pension in the 20XX-XX income year.

The Fund will continue to pay a pension to your client in the 20XX-XX income year.

Your client intends to withdraw their annual pension entitlements from the Fund in a single payment.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 301
Income Tax Assessment Act 1997 Section 301-10
Income Tax Assessment Act 1997 Section 301-25
Income Tax Assessment Act 1997 Section 301-100
Income Tax Assessment Act 1997 Section 301-110
Income Tax Assessment Act 1997 Section 307-5
Income Tax Assessment Act 1997 Subsection 307-5(1)
Income Tax Regulations 1997 Regulation 995-1.01
Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(1)
Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.05.01(11A)

Reasons for decision

Summary of decision

In this case the frequency of your client's pension payments from the Fund will not affect the taxation of the payment so long as it is paid at least once a year.

The tax-free component of your client's superannuation benefit is not assessable and not exempt income.

The taxation of the element taxed in the fund and the element untaxed in the fund of the taxable component of your client's superannuation benefit depends on their age.

A copy of our PAYG publication for superannuation income streams, Schedule 34, (NAT 70982-05.2007) is enclosed, which explains a superannuation fund's PAYG obligations.

Detailed reasoning

Superannuation Benefits

Section 307-5 of the Income Tax Assessment Act 1997 (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 subsection 307-5(1) of the ITAA 1997.

Superannuation Lump Sum Payments received

Payments made to a person from a superannuation fund will generally comprise:

· a tax-free component; and

· a taxable component which may include:

o an element taxed in the fund; and/or

o an element untaxed in the fund.

Superannuation funds will calculate these components for each benefit that is paid. The taxation of superannuation member benefits paid from complying superannuation funds are set out in Division 301 of the ITAA 1997.

Superannuation income stream

A superannuation income stream is defined in regulation 995-1.01 of the Income Tax Regulations 1997 (ITR) as:

(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.

In this case, the pension paid by the Fund must meet the requirements of subregulation 1.06(1) of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regs), which includes:

· the pension must be paid at least annually;

· it must be paid for the life of the beneficiary (including any reversionary beneficiary); and

· compliance with the payment standards in subregulation 105.01(11A) of the SIS Regs;

It can be seen, then, that the frequency of your client's pension payments from the Fund will not affect the taxation of the payment so long as it is paid at least once a year.

Member aged between preservation age and 60 years

Where your client is over their preservation age of 55 years, but under 60 years of age the tax is payable by them on some components of a superannuation benefit paid by the Fund. Similarly, the fund must withhold PAYG tax on these components.

Tax-free component

The tax-free component of a superannuation benefit is not assessable income and not exempt income of a taxpayer aged over their preservation age, but under 60 years, when paid by a complying superannuation fund (section 301-15 of the ITAA 1997).

Element taxed in the fund of the taxable component

The tax treatment of the element taxed in the fund of a taxable component depends on the age of the taxpayer.

Section 301-25 of the ITAA 1997 applies to those under 60 years but over their preservation age and states:

1) If you are under 60 years but have reached your preservation age when you receive a superannuation income stream benefit, the taxable component of the benefit is assessable income.

2) You are entitled to a tax offset equal to 15% of the taxable component of the benefit.

Element untaxed in the fund of the taxable component

The tax treatment of the element untaxed in the fund also depends on the age of the taxpayer.

Section 301-110 of the ITAA 1997 applies to those under 60 years but over their preservation age and states:

If you are under 60 years but have reached your preservation age when you receive a superannuation income stream benefit, the element untaxed in the fund of the benefit is assessable income.

The Fund must withhold PAYG tax on both the element taxed in the fund and the element untaxed in the fund.

Member aged over 60 years

From the date your client is over 60 years of age, with one exception, no tax is payable by him on a superannuation benefit paid by the Fund.

Section 301-10 of the ITAA 1997 states:

If you are 60 years or over when you receive a superannuation benefit, the benefit is not assessable income and is not exempt income.

However, any element untaxed in the fund is taxed in accordance with Division 301-C of the ITAA 1997.

Section 301-100 of the ITAA 1997 applies to those over 60 years and states:

1) If you are 60 years or over when you receive a superannuation income stream benefit, the element untaxed in the fund of the benefit is assessable income.

2) You are entitled to a tax offset equal to 10% of the element untaxed in the fund of the benefit.

The fund must withhold PAYG tax on the untaxed element.

Conclusion:

In this case the tax-free component of your client's superannuation benefit is not assessable and not exempt income.

As your client was born before 1 July 1960 their preservation age is 55.

For element taxed in the fund of the taxable component:

· where your client is aged 60 years or over when he receives his pension income from the Fund, the benefit is not assessable income and is not exempt income.

· where your client is over their preservation age but under age 60 when he receives his pension income from the Fund, the taxable component of the benefit is included in your client's assessable income. However, your client will be entitled to a tax offset equal to 15% of the taxable component of the benefit.

For element untaxed in the fund of the taxable component:

· where your client is aged 60 years or over when he receive his pension income from the Fund, the taxable component of the benefit is included in your client's assessable income. However, your client is entitled to a tax offset equal to 10% of the taxable component of the benefit.

· where your client is over their preservation age but under age 60 when he receives his pension income from the Fund, the taxable component of the benefit is included in your client's assessable income.

A copy of our PAYG publication for superannuation income streams, Schedule 34, (NAT 70982-05.2007) is enclosed, which explains a superannuation fund's PAYG obligations.

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