26/08/2013

The final ruling 'Income tax: when a superannuation income stream commences and ceases' (TR 2013/5) was released by the ATO on 31 July 2013, after being released in a draft version in July 2011.

When do these changes come into effect? From 1 July 2007.

When does a pension commence?

The draft ruling states as a result of a member's request.
The final ruling clarifies that the request must be made on or before the commencement date and cannot commence before all of the capital (rollovers and/or contributions) have been included in the interest which is to pay the income stream.

Outcome: Pensions cannot be commenced on a date before a member’s request is made; no retrospective pension documentation is permitted.  Documentation will need to be prepared in advance of the pension commencement date.

When does a pension cease?

The final ruling states that a pension ceases when:
•    there is no longer an entitled member;
•    the capital is exhausted;
•    the pension rules are not complied with (which will result in the pension taken to have not being paid at any time during the income year that the requirements are not met);
•    it is fully commuted at the request of a member (partial commutation does not result in a pension stopping); or
•    a member dies, unless there is an entitled person to receive it such as a reversionary pension or dependant beneficiary (ie. someone automatically entitled to receive the pension on the death of the original pensioner/member as outlined in the pension agreement documents, binding death benefit nomination and or governing rules of the fund)

What happens to the tax status of a pension when a member dies?

If the pension is not reversionary or payable as a pension under a binding nomination or the governing rules; tax legislation has changed enabling the superannuation interest which supports the pension to remain as tax exempt for a 'reasonable period' to allow the interest to be paid out or a new pension commenced following the death of a member in receipt of a pension.

What do you need to do as a result?

•    Plan for clients who may be entering into pension phases much earlier than usual as documents can’t be signed to confirm a pension started from a previous date.  
•    Organise documents for your clients to sign before the pension is to commence.
•    Incorporate the estate planning goals of your client with their pension set up to ensure you take advantage of the options with reversionary pensions, binding death benefit nominations and other estate planning tools.

For further information, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.