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Edited version of private advice
Authorisation Number: 1012650462161
Ruling
Subject: Minimum superannuation income stream requirements
Question 1
Will the superannuation fund (the Fund) retain its 'exempt current pension income' status until the member's benefits are paid?
Answer
Yes
This ruling applies for the following periods:
The year ending 30 June 2014
The year ending 30 June 2015
The scheme commences on:
1 July 2013
Relevant facts and circumstances
The Fund is a self-managed superannuation fund (SMSF) with one member (the Member).
The Fund was established some time ago and elected to be regulated.
The Member passed away during the relevant income year and Probate was granted during the same income year.
We received an application for a private ruling (the application) regarding the exempt current pension income status of the Fund
The application contained the following information:
• The Member was in receipt of two account based superannuation income streams (pensions) from the Fund.
• The Fund has been in pension mode for a number of years prior to the relevant income year.
• The Fund did not make any pension payments in the relevant income year.
• There was no reversionary beneficiary for either pension.
• There were no accumulation balances in the Fund.
• At the time of death, The Fund had not made sufficient pension payments to cover the pro-rata minimum pension payment required during the relevant income year on both pensions.
• As a result of the Member's death, the trustee failed to pay the minimum pension amounts to the member of the Fund in the relevant income year.
We received the following additional information:
• The advice given to the Executor by the solicitor for the estate was that distribution of the estate could not occur until a number of months after the probate.
• The Executor is unable to determine the actual value of the assets until the distribution date (during the 2014-15 income year) due to fluctuating values, income received and expenses paid.
• The Executor resolved that they needed to retain the assets within the superannuation fund until distribution date at which point the Fund would be wound up.
A copy of a Death Benefit Rule Notice (the Notice) signed by the Member and a copy of the Will of the Member (the Will) was provided.
The Notice determined how the payment of the Member's superannuation death benefits was to be made and who are the recipient(s). The Notice states:
52A.1 In the event of my death and subject to and conditional upon my de facto partner (the Spouse) surviving me for a period of thirty (30) days my total superannuation death benefits are to be divided as follows:
a. The Trustee of the Fund shall pay to the Spouse a lump sum for their sole use and benefit absolutely
b. The residue of my superannuation death benefits are to be paid in accordance with the provisions of clause 10 of my Will.
c. The payment to the Spouse of any death benefit that I have provided to them shall be in such a manner as the Spouse shall determine at their unfettered decision.
Clause 10 of the Will provides that:
10. Specific bequest - bring into account
10.1 On the division of the balance of my estate I DIRECT my executor shall bring into account the value of the residence ("the residence value") as determined in accordance with the valuations as provided for in clause 8.2 of this Will.
10.2 The Spouse is to receive one equal part, section or portion of my estate less the residence value;
10.3 For the purposes of this clause the proportion of my estate that the Spouse shall receive as referred to in the previous paragraph shall be called "the Spouse's proportion".
10.4 The amount equal to the Spouse's proportion shall be retained in the Fund by the Fund's Trustee and paid to the Spouse in accordance with the provisions of my Binding Death Benefit Rule.
Clause 8 of the Will provides that:
8. Valuation of properties
8.1 My executor shall within sixty (60) days of the date of my death obtain three independent market valuations ("the valuations") for any residence of which I am a joint proprietor ("the residence") and the property from three independent Real Estate Agents experienced and familiar with real estate values in the respective locations of the residence and the property.
8.2 The valuations shall be amortised and divided by my executor and this amount will represent the market value of each of the properties ("the market values").
8.3 The market values of both the residence and the property shall form part of my residual estate
You have confirmed that you wanted the application to include the 2014-15 income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 295-385
Income Tax Assessment Act 1997 Subsection 295-385(1)
Income Tax Assessment Act 1997 Subsection 295-385(3)
Income Tax Assessment Act 1997 Subsection 295-385(4)
Income Tax Assessment Act 1997 Section 295-390
Income Tax Assessment Regulations 1997 Subregulations 995-1.01(2)
Income Tax Assessment Regulations 1997 Subregulations 995-1.01(3)
Income Tax Assessment Regulations 1997 Subregulations 995-1.01(4)
Superannuation Industry (Supervision) Regulations 1994 Reg 1.06
Reasons for decision
Summary
As the Member has passed away, the Fund will maintain its exempt current pension income status until the period that it is most practicable for the superannuation death benefits to be paid.
Detailed reasoning
Exempt current pension income exemption
Subsection 295-385(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the income of a complying superannuation fund is exempt income, if that income would have otherwise been assessable and is sourced from 'segregated current pension assets'.
Subsection 295-385(3) of the ITAA 1997 provides that an asset is a 'segregated current pension assets' if:
(a) the assets are invested, held in reserve or otherwise 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 lodgment of the fund's *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.
In other words, the exempt current pension income exemption is not available if a fund does not or ceases to have liabilities in respect of superannuation income stream benefits. However, an exception is made where the liabilities ceased because of the death of a member.
Subregulations 995-1.01(3) and (4) of the Income Tax Assessment Regulations 1997 expands on the meaning of 'superannuation income stream benefits' to account for superannuation benefits paid after the death of a member. It provides that, for the 2012-13 and later income years, if a fund member who was receiving a superannuation income stream dies, the amount paid as a superannuation lump sum or the commencement of the new superannuation stream is taken to be the amount of a payment from a superannuation income stream of a 'superannuation income stream benefit'.
Therefore, a fund can continue to treat its assets as "segregated current pension assets" and the income generated from these assets will continue to be entitled to the exempt current pension income exemption in the period from the member's death until the member's benefits are cashed (subject to the benefits being cashed as soon as practicable).
'Practicable' is not defined in the Income Tax Assessment Regulations 1997. However the explanatory statement to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 provides examples of when it is 'practicable' to pay superannuation death benefits. It is clear from the examples provided in the explanatory statement that in order to determine if the payment was made as soon as 'practicable', there must be consideration of the circumstances leading up to the payment.
In this case, the Fund is a self-managed superannuation fund with one member. The Member passed away during the relevant income year. Prior to the Member's death, the Fund was supporting a superannuation stream payable to the Member. The superannuation income stream did not revert to another person on the death of the deceased.
The Member has nominated the Spouse to receive a portion of their superannuation benefit in the Notice [MT1]. The Notice states:
52A.1 In the event of my death and subject to and conditional upon my de facto partner (the Spouse) surviving me for a period of thirty (30) days my total superannuation death benefits are to be divided as follows:
a. The Trustee of the Fund shall pay to the Spouse a lump sum for their sole use and benefit absolutely
b. The residue of my superannuation death benefits are to be paid in accordance with the provisions of clause 10 of my Will.
c. The payment to the Spouse of any death benefit that I have provided to them shall be in such a manner as the Spouse shall determine at their unfettered decision.
In accordance with clause 52A.1(b) of the Notice, clause 10 of the Will provides that the Spouse's portion is to be calculated as follows:
10. Specific bequest - bring into account
10.1 On the division of the balance of my estate I DIRECT my executor shall bring into account the value of the resident ("the residence value") as determined in accordance with the valuations as provided for in clause 8.2 of this Will.
10.2 The Spouse is to receive one equal part, section or portion of my estate less the residence value;
10.3 For the purposes of this clause the proportion of my estate that the Spouse shall receive as referred to in the previous paragraph shall be called "the Spouse's proportion".
10.4 The amount equal to the Spouse's proportion shall be retained in the Fund by the Fund's Trustee and paid to the Spouse in accordance with the provisions of my Binding Death Benefit Rule.
Accordingly, the Spouse's share of the superannuation death benefit payment is equal to the Spouse's portion of the Member's estate less the residence value (calculated in clause 8.2 of the Will).
You have stated that the Executor is unable to determine the actual value of the assets until the distribution date (during the 2014-15 income year) due to fluctuating values, income received and expenses paid.
You have also stated that the Fund is unable to determine the amount of the superannuation death benefit to be paid to the Spouse and the beneficiaries of the Fund until the valuation of the assets are completed on the distribution date.
In consideration of the circumstances following the death of the Member, the Fund will maintain its exempt current pension income status from the date of the Member's death until the period that it is most practicable for the benefits to be paid.
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