Edited version of your private ruling

Authorisation Number: 1012487459676

Ruling

Subject: Exempt current pension income

Question

Is the interest received on maturity of a term deposit held by the superannuation fund excluded from the assessable income as exempt current pension income?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

The Fund is a complying superannuation fund and has been established for over ten years.

A private company is the corporate trustee of the Fund.

The Fund is a single member fund.

In the 200X income year, the member contributed an amount to the Fund. The trustee of the Fund invested the contributions and the existing assets of Fund into a Bank term deposit account.

The sole member of the Fund turned 60 years of age during the 200Y income year (the pension commencement date). In a letter, the member advised the trustee of the Fund that they wished to commence drawing down a pension from that date.

The member further advised the Fund that they understood that a pension could not be commenced on the pension commencement date as the only asset of the Fund was held in the Bank term deposit account. The member noted that the first pension payment would be made after the term deposit matured.

Between the date the pension commenced and the term deposit matured:

· a personal contribution was received by the trustee of the Fund and banked into the Bank cash management account, and

· a Government co-contribution was received by the trustee of the Fund and banked into the cash management account.

The cash management account has been set up to take the funds and pay the pension.

A copy of the trustee's minute states that following discussion with the Fund's auditor it was agreed to draw down the pension monthly, with payments intended to cover the period between the commencement of the pension and the maturity of the term deposit.

Before interest on the term deposit was paid, the first pension payment was made to the member from the cash management account. On the same date, a second pension payment was made to the member from the same account.

Further pension payments were made to the member in the 200Z income year:

After the commencement of the member's pension, the Fund received interest income from the term deposit account. Interest on the term deposit was payable on maturity.

You have provided a bank statement which shows that the amount invested in the term deposit account was held in trust for the Fund. The maturity date of the term deposit account was in the 200Z income year.

You also provided another bank statement which shows that you purchased a new term deposit in the same account held in trust for the Fund. The maturity date of the new term deposit account was also in the 200Z income year.

You advised that the amount invested comprised of the initial deposit, interest earned on maturity from the initial deposit and contributions.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(1)

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 295-390

Reasons for decision

Summary

Interest income derived by the Fund is brought to account when it is received.

Because the term deposit was wholly supporting the member's pension, income received from it, after the commencement of the pension, is exempt current pension income of the Fund.

Detailed reasoning

Ordinary income

The assessable income of a complying superannuation fund can consist of both ordinary income and statutory income.

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income includes income according to the ordinary concepts, which is called ordinary income.

Interest income is considered to be ordinary income and, as such, is assessable under section 6-5 of the ITAA 1997.

Taxation ruling TR 98/1 Income tax: determination of income; receipts, versus earnings, at paragraph 19 states as a general rule, the receipts method is appropriate to determine income derived from investments. However, there are exceptions to the general rule (refer paragraphs 47 and 48).

Paragraph 47 states:

The general principle is that interest is only derived, or arises, when it is received or credited. This general rule is subject to the overall principle that the appropriate method is that giving a substantially correct reflex of income…

Interest income on a bank account should be assessed to income tax to the persons who are beneficially entitled to the income. That entitlement depends on the beneficial ownership of the moneys in the account.

You have provided statements from the term deposit account which clearly shows that the corporate trustee of the Fund holds the investment in trust for the Fund. Accordingly, the beneficial interest of this term deposit account belongs to the trustee of the superannuation fund.

Since the beneficial owner of this term deposit account is the trustee of the Fund. The trustee of the Fund is liable to any tax of the interest income.

Exempt current pension income

The income of superannuation funds is generally taxed at a concessional rate of 15%. However, subdivision 295F of the ITAA 1997 operates to exempt from tax the income of a superannuation fund earned from assets that are used to finance superannuation income stream benefits. This is referred to as exempt current pension income. The exempt current pension income exemption can be claimed by all complying superannuation funds including self managed superannuation funds.

There are two methods for working out the amount of exempt current pension income for a superannuation fund paying superannuation income stream benefits:

· income from assets set aside to meet current pensions (section 295-385 of ITAA 1997); and

· income from other assets used to meet current pensions (section 295-390 of ITAA 1997).

This exemption does not apply to income from assessable contributions, such as the contribution made in the 2009-10 income year, and non-arm's length income.

Income from assets set aside to meet current pensions

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.

A superannuation fund has segregated assets if it has:

· set aside certain assets so that the income from these assets can be specifically identified as having the sole purpose of paying a superannuation income stream benefit; and

· obtained an actuarial certificate (if needed):

o before the date of lodgement of the superannuation fund's annual return for the income year; and

o which verifies that the assets and earnings that the actuary expects will be made from those assets are sufficient to pay, in part or in full, the benefit liabilities when they are due.

An actuarial certificate will not be required if:

· the superannuation fund claims the tax exemption using the segregated assets method, and

· the superannuation fund paid allocated pensions, market-linked pensions or account-based pensions at all times during the income year.

Income from other assets used to aside meet current pensions

If a superannuation fund's assets are not specifically set aside for paying a superannuation income stream benefit, the superannuation fund must determine the amount of ordinary and statutory income that relates to the proportion of fund assets relating to current pensions.

In this situation, exempt current pension income is calculated by using the proportion of the superannuation fund's average value of current pension liabilities compared to its average value of super liabilities.

A superannuation fund using this calculation method needs to obtain an actuarial certificate that certifies the proportion of income that is exempt.

In this case you have stated that the asset supporting the member's pension is held in the Bank term deposit account. 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.

The asset supporting the member's pension was segregated on commencement of the member's pension and the Fund accounts for its income 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 asset is segregated and the Fund accounts on a cash-basis.

Conclusion

Interest income derived by the Fund is brought to account when it is received. Consequently, income received on an asset when it is being held solely to fund member pensions, other than assessable contributions and non-arm's length income, is exempt from tax.