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.

Surprisingly, the ATO’s response was ‘yes’.

Before jumping to conclusions, it is important we reflect and understand a few things. Firstly, a private binding ruling is not a great source to draw general conclusions from as they are based on an individual circumstance. Secondly, the phrasing and reasoning in the ruling should be examined carefully.

In this case, the circumstances are stated that the fund is paying an income stream in the form of a Transition to Retirement income stream as defined in the SIS regulations. Further, the client is not electing to commute part of their benefit, they are simply making an election under tax law (rather than superannuation law) to have their income treated in a certain way.

The ruling steps through the logic, as follows:

  • 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.

What the ruling is silent on is whether by making the election to have the payment treated as not an income stream benefit would it be deemed a commutation of the income stream, as notice has been given to not treat the benefit as an income stream and the default assessment for benefits which are not an income stream is that of a superannuation lump sum.  However, there is a clear distinction between tax law and superannuation law, where tax law defines superannuation lump sum benefits and superannuation income stream benefits, compared to the SIS regulations which discuss commutations rather than lump sums.

More recently, the ATO have issued a statement around the private binding ruling, as there have been a fair bit of coverage on this topic of late. Effectively the ATO are saying that whilst the election can be made, there are a number of other factors that need to be considered, including whether this nomination would impact the Exempt Current Pension Income (ECPI) percentage.

So ultimately we consider that caution is recommended and a client considering this strategy who has no unrestricted non-preserved monies available should seek an individual private binding ruling from the ATO, as well as assistance from a professional SMSF administrator.

The information contained in this newsletter is provided on behalf of the IOOF group of companies and is intended for financial adviser use only. It is given in good faith and has been prepared based on information that is believed to be accurate and reliable at the time of publication. Any examples are for illustration purposes only and are based on the continuance of present laws and our interpretation of them at the time.