Edited version of your written advice

Authorisation Number: 1051218508123

Date of Advice: 17 May 2017

Ruling

Subject: Account Based Pensions

Question

Can the Taxpayer make an election pursuant to regulation 995-1.03 of the Income Tax Assessment Regulations (ITAR 1997) and have their superannuation benefit taxed in accordance with section 301-20 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Taxpayer is in receipt of benefits from within their self-managed superannuation fund (the Fund).

The Taxpayer commenced a transition to retirement income stream (TRIS) after they reached preservation age during the 2015-16 income year.

Due to the Taxpayer's retirement, the TRIS will be ceasing and transferred to accumulation and an account based pension (the ABP) will be commenced with the full accumulation account balance.

The ABP benefits will be paid under item 110 of Schedule 1 to the Superannuation Industry (Supervision) Regulations 1994 (SISR).

The ABP includes both 'tax free' and 'taxable from a taxed source' components.

The ABP amounts can be varied and have no fixed size.

The ABP meets the general pension requirements of regulation 1.06 of the SISR.

Prior to any payment being made from the ABP, the Taxpayer will elect under regulation 995-1.03 of the ITAR 1997 that a forthcoming cash payment should not be treated as a superannuation income stream benefit.

In respect of any payment for which an election is made, the Taxpayer will not be commuting any part of the pension, and they will not be requesting a lump sum payment from the trustee of the Fund.

The Taxpayer has taken lump sum payments from their TRIS to which the low rate cap amount (per section 307-345 of the ITAA 1997) applies.

The Taxpayer advises that they will continue to remain under the low rate cap threshold as described in section 307-345 of the ITAA 1997.

The Taxpayer is over their preservation age but under age 60.

Assumptions

The superannuation income stream satisfies the definition of 'account based pension' under subregulation 1.03(1) of SISR.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 301-20

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 307-70

Income Tax Assessment Act 1997 Section 307-345

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Income Tax Assessment Regulation 1997 Regulation 995-1.03

Superannuation Industry (Supervision) Regulations 1994 Item 110 of Schedule 1 Superannuation Industry (Supervision) Regulations 1994 Regulation 1.03

Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06

Reasons for decision

The Taxpayer is able to make an election pursuant to regulation 995-1.03 of the ITAR 1997 prior to the superannuation benefit being paid. Where the election has been made the superannuation benefit will be a superannuation lump sum and taxed in accordance with section 301-20 of the ITAA 1997.

Detailed Reasoning

Section 307-5 of the 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 item 1 in the table in subsection 307-5(1) of the ITAA 1997.

A superannuation benefit may be paid, and is taxed, as either a superannuation income stream benefit or a superannuation lump sum benefit. A superannuation income stream benefit is defined under section 307-70 of the ITAA 1997 as a superannuation benefit specified in the regulations that is paid from a superannuation income stream. A superannuation lump sum is defined under section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit.

In accordance with subsection 307-70(2) of the ITAA 1997, a superannuation income stream has the meaning given by the regulations.

Subregulation 995-1.01(1) of the ITAR 1997 states:

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.

The Taxpayer has advised the superannuation income stream meets the definition of pension in regulation 1.06 of the SISR and therefore it satisfies the definition of superannuation income stream in subregulation 995-1.01(1) of the ITAR 1997.

The meaning of 'superannuation income stream benefit' is provided in subregulations 995-1.01(2) to 995-1.01(5) of the ITAR 1997.

Relevantly here, subregulation 995-1.01(2) of the ITAR 1997 provides that a superannuation income stream benefit means a payment from an interest that supports a superannuation income stream other than a payment to which regulation 995-1.03 of the ITAR 1997 applies.

This view is stated in paragraph 7 of Taxation Ruling TR 2013/5 'Income tax: when a superannuation income stream commences and ceases':

Each periodic payment, in a series of periodic payments, made from a superannuation interest that supports a superannuation income stream is a superannuation income stream benefit unless an election under regulation 995-1.03 of the ITAR 1997 has been made for that payment not to be treated as a superannuation income stream benefit.

Regulation 995-1.03 of the ITAR states:

A payment from an interest that supports a superannuation income stream is not a superannuation income stream benefit if:

(a) the conditions to which the superannuation income stream is subject allow for the variation of the amount of the payments of benefit in a year in circumstances other than:

(i) the indexation of the benefit under the rules of the product; or

(ii) the application of the family law splitting provisions; or

(iii) the commutation of the benefit (including commutation to pay a surcharge liability); or

(iv) the payment of an assessment of excess contributions tax; and

(b) the person to whom the payment is made elects, before a particular payment is made, that that payment is not to be treated as a superannuation income stream benefit.

Where the conditions in paragraph 995-1.03(a) of the ITAR 1997 are satisfied a member may elect under regulation 995-1.03 of the ITAR, before a particular payment from the superannuation interest is made, to have that payment not treated as a superannuation income stream benefit for the purposes of the ITAA 1997.

The Taxpayer has advised the conditions under paragraph 995-1.03(a) of the ITAR 1997 have been, or will be, met. Therefore, provided the superannuation fund is notified of the election before the Benefit is paid, the Taxpayer will be able to make the election.

The effect of making the election is that regulation 995-1.03 of the ITAR 1997 excludes the Benefit from being a superannuation income stream benefit and therefore it is a superannuation lump sum as defined in section 307-65 of the ITAA 1997.

Taxation of superannuation lump sums

Section 301-20 of the ITAA 1997 which sets out the tax treatment of a superannuation lump sum states:

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

(2) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (3) does not exceed 0%.

(3) The amount is so much of the total of the *taxable components included in your assessable income for the income year under subsection (1) as does not exceed your *low rate cap amount (see section 307-345) for the income year.

(4) You are entitled to a *tax offset that ensures that the rate of income tax on the amount mentioned in subsection (5) does not exceed 15%.

(5) The amount is so much of the total of the *taxable components included in your assessable income for an income year under subsection (1) as exceeds your *low rate cap amount for the income year.

*To find definition of asterisked terms, see the Dictionary, starting at section 995-1

As the Taxpayer is over their preservation age and under age 60 they will be entitled to a tax offset under either, or both, subsection 301-20(2) or subsection 301-20(4) of the ITAA 1997 on any superannuation lump sum they receive.

Subsection 301-20(2) ensures that the rate of tax is 0% on the taxable component of the superannuation lump sum that does not exceed the Taxpayer's low rate cap amount (as defined in section 307-345 of the ITAA 1997) and subsection 301-20(4) limits the rate of income tax to 15% on the amount that exceeds the Taxpayer's low rate cap amount.

ATO view documents

TR 2013/5 Income tax: when a superannuation income stream commences and ceases

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