On 30 July 2013 the ATO issued TR 2013/5 – the final ruling on when an account based or transition to retirement income stream commences and ceases. This was initially released in July 2011 as TR 2011/D3
When the ATO’s view applies from
TR 2013/5 applies from 1 July 2007. The good news is the ATO will not take any compliance action where an income stream ceased because of the death of a member before the 2012-13 income year.
When a pension starts
A pension starts when the pension documents say it starts, which:
- can be before the date of the first payment, but
- cannot be before the member applies for a pension; and
- cannot be before the trustee of the fund receives the rollovers or contributions that are funding the pension.
This confirms the importance of ensuring pension documents have a start date that is consistent with the trust deed.
When a pension stops
A pension stops:
- when the trustee does not comply with the rules for the pension (for example, does not make the minimum payment during a year), in which case the pension ceases on 1 July of the financial year in which the non compliance occurred;
- when the amount supporting the pension runs out;
- when a pension is wholly commuted (which depends upon the wording of the trust deed and the process of the commutation); or
- upon a member’s death, except where the pension ‘automatically transfers’ to another person (for example because the pension is reversionary, the trust deed requires it to continue in that way, or there is a binding death benefit nomination requiring the benefit continues as a pension).
This largely follows the ATO’s position in the draft ruling except that the ruling as to when the pension stops as a result of commutation is more favourable than in the draft ruling where the ATO considered the pension ended as soon as the member asked for a commutation.
However, the tax regulations have recently changed to provide for income earned on assets supporting a pension to continue as exempt current pension income after the death of the pensioner in some cases (click here for more information). Where the regulation applies, this is also a more favourable position than the ATO view in the draft ruling where they had indicated the tax exemption ceased on the death of the pensioner.
Take home messages
Death benefit planning is still vital for clients with superannuation balances, particularly once they are in pension phase. The need for pensions to be reversionary, binding death benefit nominations or tailored trust deeds should be considered as part of an estate plan that takes into account the ATO’s position and other practical issues with the death benefit payment.