ATO view on pensions – what you must know

The ATO has released TR2011/D3 about when a pension starts and stops.

This is relevant for a number of reasons, including whether the income (including capital gains) of a superannuation fund is exempt from tax.

When a pension starts
A pension starts when the pension documents say so, but it cannot be before:

•  the member and the trustee agree to the terms of the pension; and
•  if funded from rollovers, when the rollovers are received by the fund.

This means it will be very important to make sure pension documents specify a start date to avoid any confusion.

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), in which case the pension ceased on 1 July of the year of the non-compliance;
• if the account supporting the pension runs out;
• when the trustee receives a valid request from the member to wholly commute the pension; or
• upon a member’s death, except where the pension is reversionary to another beneficiary or there is a binding death benefit nomination in place that specifies the benefit must be paid as a pension.

This last point means that where a pensioner wishes their death benefit to continue to their spouse or other beneficiary, relying on the trustee’s discretion about the death benefit leaves a gap between the person’s death and the death benefit pension starting. This means the deceased member’s account is no longer in pension phase and part of the income of the fund (including capital gains) becomes assessable for that period.

Take home messages

Where this may give rise to issues, the member should consider making:

• the pension reversionary to their surviving spouse or other beneficiary or
• a binding death benefit nomination that specifies both the beneficiary and that the pension must continue to be paid to that person.