Edited version of your private ruling

Authorisation Number: 1012405267207

Ruling

Subject: Exempt current pension income

Reasons for Decision

Question

Is income in respect of segregated current pension assets exempt from tax where the income is received after the pension has commenced?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2012

The scheme commences on:

During the income year ended 30 June 2012

Relevant facts and circumstances

The Fund is a complying self managed superannuation fund

The Fund has more than one member.

Members' assets in the Fund are segregated and held in the form of fixed term bank deposits, paying interest.

Part-way through the income year, when a member of the Fund (the Member) met a condition of release, the Member's segregated accumulation phase assets were transferred to pension phase segregated assets to commence payment of a pension to the Member.

The Member's pension is paid with reference to the prescribed percentage of the account balance.

Shortly after the commencement of the Member's pension, the Fund received interest income payments from the Member's segregated pension assets.

The Fund accounts on a cash-basis.

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 Act 1997 Subsection 295-385(6)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Regulations 1997 Regulation 295-385.01

Reasons for decision

Summary

Because the assets supporting the Member's pension were segregated before the Fund commenced paying the Member's pension, income received after the commencement of the pension is exempt income of the Fund.

Detailed reasoning

In accordance with subsection 295-385(1) of the Income Tax Assessment Act 1997 (ITAA 1997), an amount that would otherwise be assessable ordinary income or statutory income of a complying superannuation fund for an income year is exempt from income tax to the extent that it is from 'segregated current pension assets'.

The term 'segregated current pension assets' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 295-385 of the ITAA 1997.

Subsection 295-385(3) of the ITAA 1997 states that assets of a fund will be segregated pension assets if, at a time,

(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 accordance with subsection 295-385(4) of the ITAA 1997, asset 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 for the sole purpose of enabling the fund to discharge all or part of its liabilities (contingent or not), as they become due, 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.

Regulation 295-385.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) provides that the following superannuation income streams benefits are prescribed for the purposes of section 295-385 of the ITAA 1997:

(a) an allocated pension

(b) a market linked pension

(c) an account-based pension.

However, subsection 295-385(4) of the ITAA 1997 will not apply unless, at all times during the income year, the liabilities of the fund (contingent or not) to pay superannuation income stream benefits payable by the fund were liabilities in respect of income stream benefits prescribed by the regulations (subsection 295-385(5) of the ITAA 1997).

Further, under subsection 295-385(6) of the ITAA 1997, assets supporting superannuation income stream benefits being paid as allocated pensions, market-linked pensions or account-based pensions, will not be considered 'segregated current pension assets' to the extent that the value of those assets exceeds the market value of the account balance or balances supporting those income stream benefits.

In this case you have stated that the assets supporting the Member's pension are held in fixed term bank accounts and that the Member's pension is paid with reference to the prescribed percentage of the account balance . As such, it is considered that the Member is in receipt of an account-based pension. Therefore, the assets funding that account-based pension will be segregated current pension assets for the purposes of section 295-385 of the ITAA 1997.

You have also stated that the assets supporting the Member's pension were segregated prior to the commencement of the Member's pension and that the Fund accounts on a cash-basis. Consequently, income from the segregated current pension assets received after the commencement of the pension is exempt income of the Fund.

Although the pension was commenced part-way through the income year, no apportioning of income received after the pension commenced is required because the assets are segregated and the Fund accounts on a cash-basis