This information may help advise trustees of APRA-regulated superannuation funds with what to consider when a super income stream starts or stops.
This applies only to taxed, complying super funds that started a super income stream in the form of an account-based pension, including a transition to retirement income stream (TRIS), on or after 1 July 2007.
Super income stream
A super income stream includes an income stream that is a pension, according to the Superannuation Industry (Supervision) Regulations (SIS Regulations).
An income stream cannot be a pension in accordance with the SIS Regulations unless it meets two fundamental requirements. Those requirements are:
- payment occurs at least annually
- for an account-based pension, a minimum amount is paid to the member each year.
We use the term:
- 'pension' when referring to the operation of the Superannuation Industry (Supervision) Act 1993 (SIS Act) or SIS Regulations
- 'super income stream' when referring to the operation of income tax laws.
A super income stream exists when all of the following apply:
- a member is entitled to a series of payments that relate to each other
- the payments are periodic, whether paid annually or more frequently
- the payments are made over an identifiable period of time
- the minimum payment standards of the SIS Regulations have been met.
A liability to make a single payment for one year is not a series of payments and will not meet the requirement of being a super income stream. While there must be continuing liability, a super income stream may stop after only one payment.
- Taxation Ruling TR 2013/5 Income tax: when a superannuation income stream commences and ceases
Paying a super income stream
Once an account-based pension starts, there is an ongoing requirement for trustees to meet the minimum pension standards in the SIS Regulations.
If any of the requirements of the SIS Regulations are not met in an income year, both of the following apply:
- a super income stream stops for income tax purposes
- you are taken to have not been paying an income stream at any time during the income year.
Funds have an obligation to report when an income stream starts to be in the retirement phase for transfer balance cap purposes. Funds also have an obligation to report other retirement phase events after an income stream has started, most commonly commutations of retirement phase income streams, for transfer balance cap purposes.
Funds have a broader obligation to report when an income stream stops and an account is closed.
Once funds have completed on-boarding to the Member account transaction serviceExternal Link (MATS) they are required to report retirement phase events such as starting an income stream via MATS. Prior to MATS on-boarding, funds report retirement phase events via the Transfer balance account report (TBAR).
Note: Retirement phase events with an effective date before 1 July 2018 and reporting a response to a Commissioner's commutation authority should be reported through the TBAR.
- Transfer balance cap reporting protocol
- CRT Alert 081/2018 MATS Transitional reporting – Retirement phase event reporting during transition
- Transfer balance cap – Commissioner's commutation authority
Tax implications for a fund paying a super income stream to a member
Once a complying super fund starts to pay a super income stream, you may be entitled to exempt a portion of the income earned from the fund's assets until such time as the pension stops. This is referred to as exempt current pension income (ECPI).
ECPI does not include assessable contributions or non-arm's length income.
From 1 July 2017, funds are unable to claim ECPI for the earnings from assets supporting a Transition to Retirement Income Stream (TRIS) that is not in the retirement phase. These earnings will now be taxed at 15%.
A TRIS is in the retirement phase when the person receiving the TRIS reaches 65 years old or notifies their fund that they have met a specified nil cashing restriction condition of release, such as retirement, permanent incapacity or terminal illness.
A TRIS will also be in retirement phase if it starts to be paid to a reversionary beneficiary after the member’s death, irrespective of whether the reversionary beneficiary has reached 65 years old or they have personally met a nil cashing restriction condition of release.
From 1 July 2017, ECPI will be extended to certain retirement phase products such as deferred lifetime annuities which are not currently paying a benefit.
- Exempt current pension income
- Transition to retirement income streams
- Fund income tax return instructions
If you don't meet the minimum pension requirements under the SIS Regulations
If a fund doesn't meet the minimum pension payment requirements for an account-based pension in an income year, the super income stream will be taken to have stopped at the start of that income year for income tax purposes.
From the start of the income year, the account is no longer supporting a super income stream and any payments made during the income year will be super lump sums for both income tax and SIS Regulations purposes.
This is the case even if the member remains entitled to receive a payment from the fund for the pension under the governing rules or under general trust law concepts.
This means the fund will not be entitled to treat income or capital gains as ECPI for the income year.
Note: From 1 July 2017, individuals will no longer be able to elect to treat super income stream benefits as a lump sum for tax purposes.
If you don't meet the minimum pension requirements in one income year but do in the subsequent year
If the relevant rules are again complied with in the following income year, this results in a new pension starting. You will need to revalue assets at market value and recalculate the minimum pension payment required at the start of that income year.
Exercising our general power of administration to allow an APRA-regulated fund to continue claiming ECPI, even though the SIS Regulations' minimum pension standards have not been met
If the total payments in an income year to a member are less than the minimum payment amount for a super income stream, we may exercise our general power of administration (GPA) to allow the fund to continue to claim ECPI if all of the following conditions are met.
- You didn't pay the minimum pension amount in that income year because of either
- an honest mistake you made resulting in a small underpayment of the minimum payment amount for a super income stream
- matters outside your control.
- The entitlement to the ECPI exemption would have continued but for you not paying the minimum payment amount.
- When you became aware that the minimum payment amount was not met for an income year, you make a catch-up payment as soon as possible in the following (current) income year; or treat a payment (intended prior year payment) made in the current income year, as being made in that prior income year.
- Had you made the catch-up payment in the prior income year, the minimum pension standards would have been met.
- You treat the catch-up payment, for all other purposes, as if it were made in the prior income year.
If all of the above mentioned conditions are met:
- the super income stream is taken to have continued and a new pension is not started in the following income year – the proportioning rule does not need to be applied again to determine the tax-free and taxable components
- you can continue to claim an income tax exemption for earnings on assets supporting that pension, notwithstanding the fund not meeting its obligations under super law
- any payments made to the member during that income year are treated as super income stream benefit payments (ie pension payments) and not super lump sums.
If the circumstances of the underpayment do not meet all of the conditions set out above, the exercise of the GPA would not be relevant.
Defining a 'small' underpayment
We consider a small underpayment to be one that does not exceed one-twelfth of the minimum pension payment in the relevant income year.
Defining 'as soon as practicable'?
Generally, if an underpayment is due to an honest trustee error, we consider 'as soon as practicable' to be within 28 days of you becoming aware of the underpayment.
If the underpayment is due to matters outside your control, 'as soon as practicable' is considered to be within 28 days of you being in a position to be aware of the underpayment.
When you can self-assess your entitlement to the GPA concession
We allow you to self-assess and apply the GPA concession if all of the following apply:
- not meeting the minimum pension requirements was an honest mistake or was outside your control
- the underpayment is only small – does not exceed one-twelfth of the minimum annual pension payment
- all of the other GPA conditions have been met.
In all other cases, you must write to us and outline why you did not meet the minimum pension requirements for us to consider the exercise of our general power of administration.
You didn't meet the minimum pension requirements for the year ending 30 June due to a transposition error which resulted in a small underpayment
In considering whether the GPA concession would apply, the trustee would need to assess if all of the following apply:
- payments were made during the income year and not meeting the minimum pension payment requirements by 30 June was due to an honest administrative error
- the amount of the underpayment was small
- a catch-up payment was made as soon as practicable, in the following income year.
Based on meeting all of the above conditions, we will allow the trustee to self-assess and apply the GPA concession. Despite the fund not meeting its obligations under super law:
- the super income stream does not stop and a new pension is not started in the following income year
- the trustee continues to claim an income tax exemption for earnings on assets supporting that pension.
You incorrectly calculated the minimum pension requirement
The trustee makes an honest administrative error when calculating the minimum pension payment in the relevant income year. The trustee used the incorrect minimum pension percentage factor to calculate the July 2017 pension payment. The member turned 65 years old on 28 June 2017 so the percentage factor increased to 5%, however, the trustee used 4% as this was the percentage they had used in the previous year and there was a delay in updating their computer system.
The trustee needs to assess if all the following apply:
- payments were made during the income year, and not meeting the minimum pension payment requirements by 30 June 2017 was due to an honest administrative error
- the amount of the underpayment was small
- a catch-up payment was made as soon as practicable, in the following income year (2017–18).
Based on meeting all of the above conditions, we will allow the trustee to self-assess their entitlement to the GPA concession to treat the fund as having continuously paid a super income stream.End of example
If you don't meet the conditions to self-assess
If the circumstances of the underpayment do not meet all of the conditions set out above, the super income stream will be taken to have stopped for income tax purposes from the start of the income year. Therefore, the fund will not be entitled to claim ECPI in that income year.
Also, payments to a member made from the fund for that income year are not super income stream benefits and instead should be treated as super lump sums received by the member, for income tax purposes for that income year.
For the following income year, a new super income stream will be taken to have started if the relevant rules are again complied with.
If you think we should further consider your case, you need to outline the relevant circumstances to us in writing.
To ensure a fair and reasonable outcome is achieved in each case, our decision will be made in accordance with the statements and principles set out in the Taxpayers' charter, compliance model and the good decision-making model, which requires that the decision be legal, ethical, overt, sensible, timely and in accordance with the principles of natural justice.
Minimum pension payment requirements are not met due to factors outside the trustee's control
If trustees are unable to make a payment before 30 June for reasons beyond their control – such as an error or failure on the part of a financial institution – we would consider all the following in determining whether to exercise the GPA to allow the pension to continue if the:
- trustee would have been entitled to the ECPI exemption but for not paying the minimum payment amount
- catch-up amount was made as soon as possible
- circumstances that prevented the trustee from completing the pension payment were out of their control.
Recording the underpayment of the pension as an 'accrual'
You cannot record the underpayment of the pension as an 'accrual' in the accounting records of the fund. For you to meet the minimum pension payment standards you must meet the payment requirements both in form and effect. It is not enough for the rules of the pension to state a payment will be made in each income year if the payment for a particular income year is not actually made.
If you don't make the minimum pension payment in an income year, the pension will be taken to have stopped at the start of that income year for income tax purposes, unless we have exercised the GPA.
This applies even if the member remains entitled to receive a payment from the super fund for the purported income stream under the governing rules or under general trust law concepts and you record the underpayment as an 'accrual' to recognise that liability.Information about issues APRA-regulated fund trustees need to consider when a super income stream starts or stops.