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Taxation of super funds

When a superannuation income streams starts and ends for tax purposes (TR 2013/5)

Section: 6.4

Tax Ruling TR 2013/5 provides the ATO's view of when a superannuation income stream (such as an account based pension) starts and ends for tax purposes. Identifying a point in time when a superannuation income stream starts and ends is important to determine:

  • the time and value of credits and debits that count towards the client's transfer balance cap (retirement phase income streams only)
  • whether income earned on the fund's assets (including capital gains) is exempt or taxable to the fund (retirement phase income streams only)
  • whether a member's tax components should be calculated as if the member is in accumulation phase or pension phase
  • whether benefits received by the member are superannuation income stream benefits or superannuation lump sums.

When a super income stream starts

  • A superannuation income stream cannot commence until all capital which is to support the income stream has been added to the relevant super interest.
  • The commencement date must be determined with reference to the terms and conditions of the income stream as agreed between the member and the trustee.
  • The commencement date may occur before the date of the first payment, but cannot be before the member's request or application.

Accordingly, a pension can only commence after the member has made the request and the trustee has consented to the request and has all of the assets that will be used to commence the pension. As a result, it will not be possible to have a pension commencement date earlier than when the request was made.

When a super income stream ends

A super income stream ceases where there is no longer a member who is entitled, or a dependant beneficiary of a member who is automatically entitled, to be paid a superannuation income stream. This includes:

  • Where the income stream failed to satisfy the requirements for a superannuation pension in the SIS Regulations. For example, an account based pension will have ceased at the beginning of a financial year where the pension failed to satisfy the requirements for an account based pension at any time during the year.
  • Where the capital supporting the income stream has been exhausted.
  • Where the member has made a request to fully commute the income stream and that request has taken effect. The request must take effect before the time the lump sum is paid. Note: the ruling also states that a pension will not cease in relation to a partial commutation.
  • Upon the death of a member receiving a superannuation income stream, unless a dependent beneficiary is automatically entitled to receive an income stream on the death of the member (eg an automatically reversionary pension).

Exception where income stream ceases due to death

Where a member dies while receiving a superannuation income stream, and that income stream then automatically reverts to a reversionary beneficiary (or an income stream must continue to be paid to a beneficiary under a binding death nomination),it will not cease. This allows the earnings tax exemption to continue at all times during the transition from paying the original pensioner to paying the reversionary beneficiary,
and payments from the pension will maintain the same tax-free proportion in the
beneficiary's hands.

In other situations, including where a lump sum death benefit is paid or a new superannuation income stream is commenced, TR 2013/5 states that the original
income stream will cease at the time of the recipient's death.

To avoid this situation, regulations introduced in 2013 now allow the superannuation balance of a retirement phase income stream recipient who has died to continue to be treated as a retirement phase income stream for tax purposes between the date of death and the date a lump sum death benefit is paid (or a new retirement phase income stream is commenced) where the benefit is paid as soon as practicable.

This exemption applies only to the member's balance at the date of death, plus investment earnings that accrue on this balance. The following amounts are specifically excluded:

  • Insurance proceeds
  • Anti-detriment payments*

Therefore, care should be taken where amounts other than investment earnings are added to the original superannuation interest, for example life insurance proceeds or increases due to the anti-detriment payment provisions. These amounts will not be treated as a superannuation income stream for earnings tax exemption or proportioning purposes.

The Regulations also allow funds to calculate the tax-free and taxable component of such super balances differently.

*Anti-detriment payments have been abolished where either the deceased died on or after 1 July 2017, or where the death benefit is paid on or after 1 July 2019.

Last modified: Wednesday, May 1, 2019