Edited version of private ruling

Authorisation Number: 1011855271441

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Ruling

Subject: Segregated pension assets

Question

1. Can the superannuation fund claim the exemption of income from assets set aside to meet current pension liabilities under section 295-385 of the Income Tax Assessment Act 1997 (ITAA 1997) (segregated method)?

2. Can the superannuation fund claim the exemption of income from other assets used to meet current pension liabilities under section 295-390 of the ITAA 1997 (unsegregated method)?

Answer

1. No.

2. Yes providing an actuary's certificate is obtained.

This ruling applies for the following period:

2009-10 income year

The scheme commences on:

1 July 2009

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.

The Fund was established during the 2006-07 income year.

The Fund is a complying superannuation fund.

Member 1 and Member 2 are members of the Fund.

Member 1 is under 65 years of age.

Member 2 is under 65 years of age.

There were no commutations in the 2009-10 income year.

Member 1's balance as at July 2009 was an amount.

Member 2's balance as at July 2009 was an amount.

Member 1's balance as at June 2010 was an amount.

Member 2's balance as at June 2010 was an amount.

In June 2010, Member 1 contributed a non-concessional amount and a concessional amount to the member's SMSF accumulation account. The contributions were deposited into a bank account in the SMSF name.

In June 2010, Member 2 contributed a non-concessional amount and a concessional amount to the member's SMSF accumulation account. The contributions were deposited into a bank account in the SMSF name.

The SMSF earned an amount of interest income in June 2010.

The SMSF an amount of earned dividend income in June 2010.

Member 1 draws a pension of an amount in June 2010.

Member 2 draws a pension of an amount in June 2010.

The trustees propose to segregate the pension assets by using percentages to allocate assets and income between each member's accumulation and pension accounts.

Relevant legislative provisions

Subsection 295-385(1) of the ITAA 1997of the Income Tax Assessment Act 1997

Subsection 295-385(3)of the Income Tax Assessment Act 1997

Paragraph 295-385(3)(a) of the Income Tax Assessment Act 1997

Paragraph 295-385(3)(b) of the Income Tax Assessment Act 1997

Section 295-390 of the Income Tax Assessment Act 1997

Subsection 295-390(4) of the Income Tax Assessment Act 1997

Subsection 295-390(5) of the Income Tax Assessment Act 1997

Subsection 295-390(6) of the Income Tax Assessment Act 1997

Subsection 295-390(7) of the Income Tax Assessment Act 1997

Regulation 295-385.01 of the Income Tax Assessment Act Regulations

Reasons for decision

Summary of decision

The superannuation fund cannot claim the exemption of income using the segregated method under section 295-385 of the Income Tax Assessment Act 1997 (ITAA 1997). However, the fund may be able to claim an exemption of income using the unsegregated method under section 295-390 of the ITAA 1997 providing the trustees obtain an actuary's certificate for the 2009-10 income year.

Detailed reasoning

Segregated current pension assets

Under subsection 295-385(1) of the ITAA 1997, a complying superannuation fund is exempt from tax on income from assets set aside solely to meet current pension liabilities, that is, income from segregated current pension assets.

Subsection 295-385(3) of the ITAA 1997 provides that assets are segregated current pension assets if:

a) the assets are invested, held in reserve or otherwise being dealt with at that time solely to enable the fund to discharge all or part of its liabilities (contingent or not) in respect of superannuation income stream benefits that are payable by the fund at that time; and

b) the trustee of the fund obtains an actuary's certificate before the date for lodgement of the funds income tax return for the income year to the effect that the assets and the earnings that the actuary expects will be made from them would provide the amount required to discharge in full those liabilities, or that part of those liabilities, as they fall due.

This means that assets are current segregated pension assets only when they are held or invested for the sole purpose of discharging current pension liabilities of the fund.

The assets must be clearly identified as the assets dedicated to funding the superannuation income stream benefit and there is a clear relationship established between the relevant assets and the member's account.

The trustee of the fund must obtain, before the date of lodgement of the income return for the relevant income year or such later time as allowed, an actuarial certificate under paragraph 295-385(3)(b) of the ITAA 1997 that provides the extent to which the segregated assets are able to meet liabilities relating to the superannuation income stream benefits. However, since 1 July 2004, the requirement for complying funds to obtain an actuarial certificate is not required if a fund is paying pensions as prescribed in the regulations and no other type of pension. The prescribed pensions are account-based pensions, allocated pensions and market linked pensions [regulation 295-385.01 of the Income Tax Assessment Act Regulations (ITAR)].

From the facts provided, the current pension assets are not segregated in accordance with subsection 295-385(3) of the ITAA 1997. The trustees have not identified specific assets as belonging to each member. The method proposed is done by percentage and not by allocation of identifiable assets to support each member's pension.

As the pension assets of the fund are not segregated current pension assets, the fund cannot claim the exemption of income from assets set aside to meet current pension liabilities under section 295-385 of the ITAA 1997.

Unsegregated current pension assets

Although the fund cannot claim the exemption of income under section 295-385 of the ITAA 1997, the fund may be able to claim the exemption under section 295-390 of the ITAA 1997.

Under this section, income from other assets used to meet current pension liabilities is also exempt from tax. This section entitles a complying superannuation fund to an exemption for so much of its income that is attributable to its liability to pay current pensions.

If a fund uses the proportional unsegregated assets method in section 295-390 of the ITAA 1997, the fund will need an actuarial certificate for each year to claim a tax exemption, regardless of the type of pension being paid [sections 295-390(4) to (7) of the ITAA 1997].

In this case, as it has been determined that the assets are not segregated pension assets, the trustee must obtain an actuarial certificate each year to claim the exemption under section 295-390 of the ITAA 1997.

Conclusion

The superannuation fund cannot claim the exemption of income using the segregated method under section 295-385 of the Income Tax Assessment Act 1997 (ITAA 1997). However, the fund may be able to claim an exemption of income using the unsegregated method under section 295-390 of the ITAA 1997 providing the trustees obtain an actuary's certificate for the 2009-10 income year.

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