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Taxation of super benefits

Taxation of payments from a superannuation income stream

Section: 7.12

The tax treatment of benefits paid from a superannuation income streams can vary depending on whether the payments are treated as superannuation income stream benefits or superannuation lump sum benefits.

Tax treatment of pension payments

For tax purposes, a pension payment from a superannuation income stream will be treated as a superannuation income stream benefit unless the member has made an election under Tax Regulation 995-1.03 to have the payment treated as a superannuation lump sum. The ATO also confirms this position in TR 2013/5.

However, it is important to note that even where the member makes an election to have the payment treated as a lump sum for tax purposes, it is still a pension payment for superannuation purposes and will count towards meeting the minimum pension draw-down requirements under the SIS Regulations.

For example, in the situation where a trustee paid a member the minimum annual payment required for their account based pension in the form of four quarterly payments, and the member elected to have each payment taxed as a lump sum, the trustee would have satisfied the minimum annual payment requirements for the account based pension and the payments would then be taxed as a superannuation lump sum in the hands of the member.

Note:
although clarified by the ATO, many superannuation funds' governing rules or systems may not yet be in a position to process pension payments as superannuation lump sums for tax purposes. For example, where a client elects for a payment from a pension to be taxed as a superannuation lump sum, the trustee may not count this payment towards the minimum payment requirement.

Please contact your client's superannuation fund to clarify how they will treat payments subject to these elections.

Making a Tax Regulation 995-1.03 election

For an income payment to be taxed as a lump sum, member must make an election under Tax Regulation 995-1.03. The Regulation provides that a payment from a super income stream interest is not a superannuation income stream benefit if:

  • The conditions to which the income stream is subject allow for the variation of the amount of the payments of benefit in a year in circumstances other than:
  • Indexation under the rules of the product
    • the application of family law splitting
    • the commutation of the benefit
    • the payment of an excess contributions tax assessment, and
  • The person to whom the payment is made elects, before a particular payment is made, that the payment is not to be treated as a superannuation income stream benefit.

However, it's important to note that the Regulations do not prescribe specific requirements for making this election. Advisers and their clients should therefore contact their super fund to determine if and in what form such elections can be made. Trustees should seek legal advice to confirm that they are able to accept such elections under their trust deeds.

There also appears to be nothing to prevent an election relating to a number of future payments from as superannuation income stream (eg an election that covers an entire financial year of regular payments).

As mentioned though, the key is to ensure that any 'lump sum payment' elections are made before the payments themselves are made.

Implications of making the election

Where a member makes a valid election under regulation 955-1.03, the payment will be taxed as a lump sum superannuation benefit payment. Where the member is age 60 or over this would make no difference to the taxation of the payment as both superannuation income stream and lump sum benefit payment are tax-free.

However, where the member is under age 60, making an election could result in different tax outcomes due to the different tax treatment of superannuation lump sum benefits and superannuation income stream benefits received by taxpayers under age 60.

Tax treatment of partial commutations

The ATO has confirmed in TR 2013/5 that a partial commutation from a superannuation income stream will be treated as an income stream benefit for tax purposes unless the member made an election under Tax Regulation 995-1.03 to treat the partial commutation as a lump sum benefit for tax purposes.

Do partial commutations count toward the minimum payment requirement?

In addition, the ATO has confirmed in SMSFD 2013/2 that in relation to account based pensions paid from SMSFs, any partial commutations, except those rolled over within the super system, will count towards the minimum payment requirement. Further, the ATO confirmed in the determination that a partial commutation is a lump sum for the purposes of the SIS Regulations and counts towards the minimums regardless of whether it is paid as cash or in specie. Therefore, members of an SMSF will have the flexibility to receive a payment as cash or in the form of an in specie transfer of assets and in either case the amount will count towards their minimums.

Note: these amounts will still be treated as income stream benefits for tax purposes unless a Regulation 995-1.03 election has been made prior to each
payment or transfer.

The ATO also released SMSFD 2014/1, which states that partial commutations from transition to retirement account based pensions run through an SMSF count toward
the minimum payment requirement but do not count toward the 10% maximum payment requirement. It is important to note though that partial commutations are generally
only possible to the extent the member's pension balance consists of unrestricted non-preserved benefits.

Further clarification is required about whether partial commutations from an account based pension paid through a large complying super fund would count towards the minimum payment requirement.

Full commutations -always lump sum benefits for tax purposes

In TR 2013/5 the ATO confirmed that in contrast to either periodic pension payments or partial commutations, the full commutation of a superannuation income stream will always be a lump sum benefit for tax purposes, This is because the interest that it is paid from is no longer a superannuation income stream so therefore it must be treated as a lump sum for tax purposes.

Last modified: Tuesday, May 2, 2017