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Edited version of private advice
Authorisation Number: 1012648053367
Ruling
Subject: Superannuation income stream
Question
Is an annual superannuation income stream payment made to you in an income year in which you turn age 60, but before you actually reach age 60, included as assessable income under section 301-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
Yes.
This advice applies for the following period
Year ended 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
You have been receiving an allocated pension for a number of years, as transition to retirement, paid as a yearly lump sum pension in the first quarter of each income year.
Your PAYG Summary from a superannuation provider, has not prorated your income stream benefit into pre and post amounts on reaching 60 years of age in the relevant income year.
You are of the opinion that having reached 60 years of age during the relevant income year, part of the payment should be treated as non-taxable.
You reached 60 years of age during the second quarter of the relevant income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 301-10.
Income Tax Assessment Act 1997 Section 301-25.
Income Tax Assessment Act 1997 Subsection 301-25(1).
Income Tax Assessment Act 1997 Subsection 301-25(2).
Reasons for decision
Summary
As you had reached your preservation age and were below age 60 at the time the payment was paid, the taxable component of the superannuation income stream benefit is to be included in your assessable income for the relevant income year.
However, you are entitled to a tax offset equal to 15% of the taxable component element taxed in the fund of the superannuation income stream benefit.
Detailed reasoning
Superannuation income stream
A superannuation income stream benefit has two components: a tax-free component and a taxable component.
If you are under 60 years but have reached your preservation age when you receive a superannuation benefit, the tax free component of the benefit is not assessable income and is not exempt income. Your superannuation benefit may be a superannuation lump sum or a superannuation income stream benefit.
If you are 60 years, the relevant operative provision is section 301-10 of the Income Tax Assessment Act 1997 (ITAA 1997) which states:
If you are 60 years or over when you receive a superannuation benefit, the benefit is not assessable income and is not exempt income. [bold emphasis added]
Section 301-25 of the ITAA 1997 applies if the member is aged at or over preservation age but under 60 years at the time of payment.
Under subsection 301-25(1) of the ITAA 1997 it states:
If you are under 60 years but have reached your *preservation age when you receive a *superannuation income stream benefit, the *taxable component of the benefit is assessable income.
In the facts of this case, you reached 60 years during the second quarter of the relevant income year. However, your yearly superannuation income stream benefit was made to you during the first quarter of the relevant income year, prior to reaching 60 years.
Therefore, as you had reached your preservation age and were below age 60 at the time the benefit was paid, the taxable component of the superannuation income stream benefit is to be included in your assessable income in accordance with subsection 301-25(1) of the ITAA 1997.
This provision does not allow for prorating the payment.
The Commissioner of Taxation has no discretion in the legislation quoted above to excuse the fact that you received the superannuation income stream benefit prior to your 60th birthday. The Commissioner can only exercise, or refuse to exercise, a discretion when the Commissioner is given that discretion in the legislation he administers.
Consequently, the taxable component in the fund is to be included in your assessable income for the relevant income year. This amount is taxed at marginal tax rates plus Medicare levy (and Medicare levy surcharge, if applicable).
However, subsection 301-25(2) of the ITAA 1997 provides that you are entitled to a tax offset equal to 15% of the taxable component element taxed in the fund of the superannuation income stream benefit.