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Edited version of your written advice
Authorisation Number: 1013128436829
Date of advice: 23 November 2016
Ruling
Subject: Taxation of superannuation funds
Question 1
If a member of a superannuation fund (the Fund) elects under regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (ITAR 1997) before a particular superannuation income stream payment is made (the Benefit), that the Benefit is not to be treated as a superannuation income stream benefit, will the Fund be entitled to claim exempt current pension income (ECPI) in respect of the pension under section 295-385 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer
No
Question 2
If a Fund member elects under regulation 995-1.03 of the ITAR 1997 before a particular superannuation income stream payment is made (the Benefit), that the Benefit is not to be treated as a superannuation income stream benefit, will the Fund be entitled to claim ECPI in respect of the pension under section 295-390 of the ITAA 1997?
Answer
Yes
This ruling applies for the following period:
Income year ending 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
The Fund is a complying superannuation fund.
A member of the Fund is, or will shortly be, in receipt of a superannuation income stream (the Benefit) from the Fund.
The Benefit satisfies the definition of ‘account- based pension’ under the Superannuation Industry (Supervision) Regulations 1994 (SISR) and under all other relevant provisions of superannuation law.
The Benefit also meets the definition of a ‘transition to retirement income stream’ (TRIS) in subregulation 6.01(2) of the SISR.
The conditions under which the member’s pension is subject, allow for variation of the amount of the member’s benefit payments.
The member will elect under regulation 995-1.03 of the ITAR 1997, before each benefit is paid, that the benefit is not to be treated as a superannuation income stream.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subdivision 295-F
Income Tax Assessment Act 1997 Section 295-385
Income Tax Assessment Act 1997 Section 295-390
Income Tax Assessment Regulations 1997 Regulation 995-1.03
Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.01(2)
Reasons for decision
Subdivision 295-F of the ITAA 1997 operates to exempt from tax the income of a complying superannuation fund earned from assets that are used to finance current pensions. There are two different methods which a trustee of a fund may use to determine the amount of income that is exempt from income tax, depending on the circumstances of the particular case:
(i) where the income is derived from segregated current pension assets under section 295-385 of the ITAA 1997 (‘segregation’); or
(ii) where the income is apportioned under section 295-390 of the ITAA 1997 ('apportionment').
Subsection 995-1(1) of the ITAA 1997 states that 'segregated current pension assets' has the meaning given by section 295-385 of the ITAA 1997, which has two definitions of the term in subsections 295-385(3) and (4) of the ITAA 1997.
Both subsections 295-385(3) and (4) of the ITAA 1997 provide that assets are segregated current pension assets 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.
Where assets are not segregated under section 295-385 of the ITAA 1997, section 295-390 of the ITAA 1997 provides that a proportion of the income of a complying superannuation fund can be exempt from tax, calculated under a formula in subsection 295-390(3) of the ITAA 1997.
Therefore, if a member makes, or has made, an election under regulation 995-1.03 of the ITAR 1997 to have a payment from an account-based pension not be treated as a superannuation income stream benefit, the Fund cannot claim ECPI in respect of the pension under section 295-385 of the ITAA 1997.
If a member makes, or has made, an election under regulation 995-1.03 of the ITAR 1997 to have a payment from an account-based pension not be treated as a superannuation income stream benefit, the Fund can claim ECPI in respect of the pension under section 295-390 of the ITAA 1997. However, the average value of the Fund’s current pension liabilities in respect of the pension for the purposes of applying the formula in subsection 295-390(3) of the ITAA 1997 will be reduced reflecting the value of the superannuation lump sum that results from making the election.