The ATO has issued draft taxation ruling TR 2011/D3, which explains the Commissioner's view on when a superannuation income stream starts and ends as well as when the superannuation income stream is payable. When a superannuation income stream starts and ends is important for a number of reasons. First, it determines when the income and gains on the assets that support the superannuation income stream are exempt from income tax. Second, it is relevant for calculating the tax free and taxable components of the superannuation income stream on commencement.
Hall & Wilcox has maintained the position for some time that superannuation income streams must be documented by way of a deed with a power within the superannuation fund trust deed to pay a reversionary superannuation income stream. Also, it has been our view and practice to make superannuation income streams reversionary in order to avoid adverse capital gains tax consequences on the death of a member.
Further, in our view a binding death benefit nomination is not sufficient to make a superannuation income stream reversionary as the nomination cannot alter the fundamental terms of the superannuation income stream.
Hall & Wilcox documentation
Hall & Wilcox documentation and practice has been to prepare a deed between the fund trustee and the member to record the terms of the superannuation income stream that nominates a particular reversionary beneficiary. Further, any amendment to the terms of the existing superannuation income stream must be by way of amending deed.
The key message is that a superannuation income stream should be established by way of deed, which should specify an eligible dependent to be the reversionary beneficiary from the outset.
Anyone contemplating adding a reversionary beneficiary to an existing Hall & Wilcox superannuation income stream must do so by amending deed. We can be contacted as set out below.
When does a superannuation income stream start?
The ruling sets out the Commissioner's view on when a superannuation income stream starts. The ruling states (and it is our view that the Commissioner is correct) that a superannuation income stream starts on the date agreed by the member and the fund trustee subject to the fund's trust deed and the relevant provisions of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). Importantly this means that:
- a superannuation income stream may start prior to the first payment;
- a superannuation income stream cannot start before the member and the trustee agree on the terms and conditions that will govern the superannuation income stream; and
- the member or dependent beneficiary who is entitled to receive the superannuation income stream must be specified in those terms and conditions.
From a practical perspective, members can start a superannuation income stream on 1 July and take the minimum income stream payment on 30 June in the same financial year and the income and gains on assets supporting the superannuation income stream will be tax exempt for the whole year. However, members need to be careful because contributions to the fund after the commencement date of the superannuation income stream cannot form part of the superannuation income stream. This means that members commencing superannuation income streams at a date before the first payment must consider when contributions were made to the fund.
When does a superannuation income stream end?
One of the contentious issues has been whether death causes a superannuation income stream to end. Our view is that, as a superannuation income stream is a contract between the fund trustee and the member, the contract ends when the member dies, unless there is a reversionary beneficiary specified under the contract.
This has long been the view held by the Commissioner and has now been put forward in draft taxation ruling TR 2011/D3. The draft ruling reinforces the Commissioner's existing view and importantly states that a superannuation income stream will end when there is no longer a member who is entitled to receive benefits from the superannuation income stream or a dependent beneficiary of a member who is automatically entitled to receive benefits from the superannuation income stream.
It is this concept of when a reversionary beneficiary is 'automatically entitled' to receive benefits under a superannuation income stream that is subject to some discussion in draft taxation ruling TR 2011/D3. The draft ruling provides that for a superannuation income stream to be considered to have automatically transferred to a dependent beneficiary on the death of a member, the rules of the superannuation income stream must specify this will occur. Further, the rules must specify both the person to whom the benefit will become payable and that it will be paid in the form of a superannuation income stream. The rules may also specify a class of person to whom the benefit will become payable, for example a spouse. However, it is not sufficient that the superannuation income stream becomes payable to a beneficiary of a deceased member only because of a discretion or power granted to the trustee.
Whilst draft taxation ruling TR 2011/D3 does focus on the 'rules of the fund' it is important to remember that the rules of a fund are not limited to the fund trust deed itself but will be contained within other documents that govern how the fund will operate including but not limited to superannuation income stream deeds that the fund trustee enters into with the member. It is for this reason that the Hall & Wilcox practice of having superannuation income streams documented by way of deed and including within that deed a nominated reversionary beneficiary will comply with the proposed administrative practice of the Commissioner.
A superannuation income stream will also end in the following circumstances:
- where there is a failure to comply with the rules and the payment standards of the SIS Act and regulations. In this circumstance the failure to comply with the rules will mean that the superannuation income stream is not a complying superannuation income stream for that relevant year. However the superannuation income stream can become a complying superannuation income stream in latter years provided the fund trustee complies with the relevant SIS Act rules and regulations;
- where the assets supporting the superannuation income stream are exhausted the superannuation income stream will come to an end;
- through the act of commutation. Here draft taxation ruling TR 2011/D3 put forward the view that a superannuation income stream will end upon receipt of a valid request from a member to fully commute their entitlement to receive a future income stream for a lump sum. The receipt of the valid request then causes the cessation of the superannuation income stream. What this means is that if the members are contemplating commuting a superannuation income stream to a lump sum where there are significant unrealized capital gains they may consider selling those assets prior to lodging a valid commutation request with the fund trustee. In this way the fund trustee may be able to argue that any gain is exempt as, when the CGT event occurred, the superannuation income stream was still on foot.
What are the practical implications?
Draft taxation ruling TR 2011/D3 highlights the need for careful planning to be undertaken at the time superannuation income streams start and when any changes are proposed. It is important that members take advice at the outset as to whether a superannuation income stream should be reversionary and members should review the funds trust deed to ensure it permits a dependent to be nominated as a reversionary beneficiary.
In deciding whether a superannuation income stream should be reversionary, it is important that broader estate planning issues are also considered from the outset.
Generally a superannuation income stream will be reversionary if the funds trust deed specifies that when a member dies their assets can be distributed in the form of a superannuation income stream as opposed to a lump sum and a recipient is nominated under the trust deed. We would not recommend amending the funds trust deed to specify a reversionary beneficiary. Instead, the fund trustee and member should document the terms of the superannuation income stream and the relevant reversionary beneficiary. In our view this is a better approach and is consistent with our existing practice of preparing a deed to record the terms of the superannuation income stream between the fund trustee and the member.
If a superannuation income stream is on foot and the member has not nominated a reversionary beneficiary, the member should consider commuting their existing superannuation income stream and commencing a new superannuation income stream, the terms of which nominates a reversionary beneficiary. However, before this strategy is implemented the impact of any change in the tax free and taxable components of the superannuation income stream and any accumulated unrealised capital gains needs to be considered.
Finally, the trustee should consider selling assets likely to generate large capital gains tax liabilities to refresh the cost base while the fund trustee is paying a superannuation income stream. In this situation it is important to consider the funds trust deed, investment strategy and the prudential requirements of the SIS Act, including the sole purpose test, to ensure the trustee's actions are in the best interest of members. Further, the fund trustee should consider the possible application of any anti-avoidance provisions within the Income Tax Assessment Acts. In our view it is unlikely that the Commissioner would apply Part IVA to a fund trustee selling assets during the life of a member because any tax benefit that could potentially arise under the general anti-avoidance provisions is limited solely to a contingent future tax benefit, for example if the member dies while they still hold assets with large unrealised gains. For the reasons given above it is possible for many members to either:
- structure their affairs such that a reversionary beneficiary would continue to receive the superannuation income stream automatically so that their death would not give rise to a capital gains tax liability for the fund; or
- the members may simply spend the money after living a long and fruitful life such that no capital gains tax liability would ever arise.
For these reasons it is difficult (although not impossible) for the Commissioner to make a determination under Part IVA at some time in the future upon the member's death. It is interesting to ponder whether the Commissioner would start trawling through the death notices to see whether there is a potential application of Part IVA to members and their funds. In our view the Commissioner would not stoop that low.