Changes to Transition to Retirement
Closing out the 2015 year on an interesting note, the Australian Taxation Office (ATO) issued a Private Binding Ruling which asked whether a person could give their SMSF a notice which stated that their Transition to Retirement Pension income was to be treated not as an income stream.
The aim of this question was to determine if, for tax purposes, it was possible to treat an ordinary pension payment as a lump sum without having to process as a formal commutation.
A superannuation benefit is either an income stream or a lump sum. A ‘superannuation income stream benefit’ is defined in the Income Tax Assessment Act as a ‘benefit specified in the regulations that is paid from a superannuation income stream’ with a ‘superannuation lump sum benefit’ being any superannuation benefit which is not an income stream benefit. Tax Ruling 2013/5 states that each periodic payment in a series of payments from a superannuation income stream (which includes a TTR pension) is a superannuation income stream benefit unless an election is made to not treat the payment as a superannuation income stream benefit under the Income Tax Assessment Regulations. The relevant Income Tax Assessment Regulations state that a payment from a pension is not a superannuation income stream benefit if The amount of the pension can be varied in circumstances other than inflation, family law splits, commutation or payment of excess contributions tax, and The person receiving the payment elects to have it treated not as a superannuation income stream benefit before the payment is made. Assuming valid notice is given and the pension meets the ‘flexibility of payment’ requirement (as well as the standard pension rules), the payments can be treated not as income stream benefits, and thus treated as superannuation lump sum benefits. This means that someone over preservation age but under age 60 is able to use their Low Rate Cap (currently $195,000 2015/16) to offset the taxable component of the pension payment.