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Subject: Exempt current pension income

Questions

Can the Fund claim a deduction for income from segregated current pension assets where Member 2's pension assets are pooled together into a single term deposit and cheque account?

Can the Fund can claim a deduction where Member 2 commences a third pension and assets backing that pension are pooled with Member 2's other assets.

Advice/Answers

Yes.

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Member 1 and Member 2 are members of the Fund, a regulated self managed superannuation fund.

The Fund's assets comprise term deposits and cheque accounts.

All term deposits and cheque accounts are separate from each other and have different bank account details.

The Fund is using the segregated current pension assets method.

Member 2 is in pension phase and is drawing two separate income streams.

Pension 1 is funded by a term deposit and a cheque account.

Pension 2 is funded by a term deposit.

You intend to pool assets from Pension 1 and Pension 2 into a single term deposit and cheque account.

You intend to commence a third pension for Member 2 and pool assets backing that pension with Member 2's other assets.

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 Subsection 295-385(5).

Income Tax Assessment Regulations 1997 Regulation 295-385.01.

Reasons for decision

Summary

It is considered that all assets of Member 2 are being used solely to enable the Fund to discharge all or part of its liabilities in respect of Member 2's pension. Subject to correct record keeping the assets are segregated current pension assets.

Therefore, the Fund may claim a deduction for income from the segregated current pension assets where Member 2's pension assets are pooled together into a single term deposit and cheque account. Further the Fund can claim a deduction where Member 2 commences a third pension where assets backing that pension are pooled with Member 2's other assets.

Detailed Reasoning

Exempt current pension income

Subdivision 295-F of the Income Tax Assessment Act 1997 (ITAA 1997) operates to exempt from income tax some of the income of a superannuation fund. This income includes the income earned from assets that are used to pay current superannuation income stream benefits.

There are two ways to claim a tax exemption in respect of the income funding a current pension. One method depends on whether the superannuation fund's assets, at the time the pension starts to be paid, are segregated current pension assets within the meaning of section 295-385 of the ITAA 1997.

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:

· 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

· 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.

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 superannuation fund.

Further, in order to claim the exemption in respect of segregated current pension assets under this subsection, the trustee of a superannuation fund must obtain an actuary's certificate.

However, the assets of a superannuation fund can also be segregated current pension assets under subsection 295-385(4) of the ITAA 1997 which states:

Assets of a complying superannuation fund are also segregated current pension assets of the fund at a time if 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:

(a) that are payable by the fund at that time; and

(b) prescribed by the regulations for the purposes of this section.

The regulation prescribed for the purposes of section 295-385 of the ITAA 1997 is regulation 295-385.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) which states:

For section 295-385 of the Act, the following superannuation income stream benefits are prescribed:

· an allocated pension within the meaning of the SIS [Superannuation Industry (Supervision)] Regulations;

· a market linked pension within the meaning of the SIS Regulations;

· an account-based pension within the meaning of the SIS Regulations.

Unlike subsection 295-385(3) of the ITAA 1997, subsection 295-385(4) of the ITAA 1997 does not require an actuary's certificate to be obtained. However, subsection 295-385(4) of the ITAA 1997 will not apply unless subsection 295-385(5) of the ITAA 1997 is satisfied. Subsection 295-385(5) of the ITAA 1997 states:

Subsection (4) does not apply unless, at all times during the income year, the liabilities of the fund (contingent or not) to pay superannuation income streams payable by the fund were liabilities in respect of superannuation income stream benefits that are prescribed by the regulations for the purposes of this section.

The effect of subsection 295-385(5) of the ITAA 1997 is that subsection 295-385(4) of the ITAA 1997 will only apply where the pensions payable during the income year comprised of:

· allocated pensions,

· market linked pensions, or

· account-based pensions.

In this case the Fund may have segregated current pension assets if all the pensions it is paying during an income year are one of these three types of pension.

You state that Member 2 is in pension phase and is drawing two separate income streams. Pension 1 is funded by a term deposit and a cheque account. Pension 2 is funded by a term deposit.

It is considered that Member 2 is in receipt of account-based pensions. Consequently, the assets funding that account-based pensions will be segregated current pension assets if they are held in reserve or otherwise being dealt solely to enable the Fund to discharge all or part of its liabilities (contingent or not) in respect of that pension.

Segregation of pension assets

Whether or not assets have been appropriately segregated is a question of fact. The legislation does not specify how this is to be done.

With some assets, such as property, it is not possible for the asset to be a segregated pension asset when it is not used solely for the purposes of meeting pension liabilities. This is because it is not possible to invest, hold in reserve or deal with only a portion of the property. However, there would be no doubt that if a number of separate bank accounts were established, that the cash in one of these accounts could be a segregated pension asset. Even when the cash is held in one account it is possible for some of the cash to be a segregated pension asset.

It is the responsibility of the trustee of the superannuation fund to clearly and unambiguously specify which assets have been set aside exclusively to fund pensions.

You enquire whether the Fund can claim a deduction for income from segregated current pension assets where Member 2's pension assets are pooled together into a single term deposit and cheque account. Further you also asked whether the Fund can claim a deduction where Member 2 commences a third pension and assets backing that pension are pooled with Member 2's other assets.

As noted above, the legislation does not specify how current pension assets in the Fund are to be segregated. Accordingly, the legislation does not state that it is necessary for the trustee of the Fund to maintain a separate term deposit and cheque account for each pension being made to Member 2.

However, the trustee of the Fund is responsible for clearly identifying in the accounts and records of the Fund at all times that comprise the segregated assets from which the pensions for Member 2 will be funded.

It is considered that all assets of Member 2 are being used solely to enable the Fund to discharge all or part of its liabilities in respect of Member 2's pension. Subject to correct record keeping the assets are segregated current pension assets.

Therefore, the Fund may claim a deduction for income from the segregated current pension assets where Member 2's pension assets are pooled together into a single term deposit and cheque account. Further the Fund can claim a deduction where Member 2 commences a third pension where assets backing that pension are pooled with Member 2's other assets.