When a superannuation pension commences and ceases
The ATO has published a Ruling about “starting and stopping a new superannuation income stream” (i.e., a superannuation pension).
The Ruling applies to complying superannuation funds (including SMSFs) which commence an ‘account-based pension’, including a ‘transition to retirement pension’, and focuses on when a pension commences and when it ceases and, consequently, when a pension is payable.
These concepts are relevant to determining the income tax consequences for both the superannuation fund (including the availability of the pension exemption) and the member in relation to superannuation income stream benefits paid.
The ATO states there has been a lot of interest as to when a pension ceases, and the most common circumstances for a pension ceasing are summarised as follows:
- When all pension capital is exhausted;
- There has been a failure to comply with the superannuation pension rules (Editor: Note that there are limited circumstances where the Commissioner may apply his powers of general administration to nonetheless allow the pension to still continue);
- The pension is fully commuted (i.e., when a member, or beneficiary of a deceased member, chooses to exchange all of their pension entitlements for a lump sum); or
- The member has died – A pension ceases as soon as the member in receipt of the pension dies, unless a dependant beneficiary is automatically entitled to a reversionary pension.
Note that recent amendments to the tax law, applicable to the 2012/13 income year and later income years, ensure that where a member was receiving a pension immediately before their death, the fund will continue to be entitled to the pension exemption from the time of the member’s death until their benefits are cashed, provided the relevant requirements are met (e.g., the benefits must be cashed ‘as soon as is practicable’ following the death of the member).