Does your SMSF allow election to treat pension as lump sum? ATO is trying to stop you

Treat pension as lump sum? ATO says yes, but only if Deed allows it

Treat pension as lump sum? The ATO has reluctantly confirmed that a Self-Managed Superannuation Fund's exempt pension income is reduced when an election is made. This is to treat a pension payment as a lump sum. This is for income tax purposes. The Commissioner confirms the above in two Private Rulings:Treat pension as lump sum

However, the ATO looks carefully at your SMSF Trust Deed to see if the power exists to make such an election.

Election to treat pension as lump sum

No longer can you elect to treat a superannuation income stream benefit as a lump sum for tax purposes. This is under Regulation 995-1.03 ITA Regs. This is from 1 July 2017. However, until 30 June 2017, you continue to make an election to treat an income stream payment as a lump sum. Anyone under 60 pays less tax. The election is common for the transition to retirement income stream (TRIS).

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Impact on fund's exempt income

Does the election under Regulation 995-1.03 decrease the fund's exempt current pension income (ECPI)?  The answer according to the above Private Rulings is yes.

If a member makes an election under Regulation 995-1.03 the fund claims the ECPI for the pension under s 295-390 ITAA 1997. This is using the proportionate method. There are consequences, however. The 'average value of the fund's current pension liabilities' for the pension under s 295-390(3) is reduced. This reflects the value of the new super lump sum.

Segregated method

What if you elect under reg 995-1.03 for the payment of an account-based pension to be not treated as a super income stream benefit? Sadly, the fund can't claim an ECPI for the pension under the 297-385 segregation rules. The segregated method is based on the 'segregated current pension assets' in ss 295-385(3) and (4).

Does your SMSF Deed allow elections?

The ATO can potentially deny a fund's ECPI claimed under the segregated method where the Deed does not allow such an election. Our SMSFs and Deeds of Variation allow for such an election. If your client's SMSF fund has claimed its ECPI for an affected pensions using the proportionate method, the ATO may look to reduce the exempt income amount. A correctly drafted SMSF Deed reduces the ATO's attack.

Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, Dip Ed, BArts(Hons), LLM, MBA, SJD
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Edited version of your written advice regarding 'treat pension as lump sum'

Authorisation Number: 1013107841899

Disclaimer

You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.

The advice in the Register has been edited and may not contain all the factual details relevant to each decision. Do not use the Register to predict ATO policy or decisions.

Date of advice: 27 October 2016

Ruling 'treat pension as lump sum'

Subject: Taxation of superannuation funds regarding 'treat pension as lump sum'

Question

Will the Superannuation Fund (the Fund) remain entitled to exempt current pension income (ECPI) during the year (assuming all other requirements are met) under section 295-390 of the Income Tax Assessment Act 1997 (ITAA 1997) where the Fund holds a mixture of pension and non-pension liabilities at some point during the year and these are not always supported by separately identified assets?

Answer

Yes.

This ruling applies for the following period

Income year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

The Fund is a complying superannuation fund.

A member of the Fund is 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 in sub regulation 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 make an election under regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (ITAR).

The members will elect under regulation 995-1.03 of the ITAR, 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 295F

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 295F of the ITAA 1997 operates to exempt from tax the income of a 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 (segregation); or

(ii) where the income is apportioned under section 295-390 ('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 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 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. tre

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