The other PBR: tax free transition to retirement pension payments

The banana sundae of a transition to retirement pension is to have the earnings of the superannuation interest supporting the pension to be tax free and to have the pension payments themselves tax free as well.   While this sundae can happen for individuals aged 60 or more – it now appears that this sundae may also apply to individuals who have not yet reached age 60.  

How can the not-yet-attained age 60 have their banana sundae?  The answer is in Tax Reg 995-1.03 and in a recently released Private Binding Ruling.  But a word of caution must apply.  Subsequent to the issue of the PBR the ATO has indicated that using the strategy set out in the Ruling may affect (read “adversely”) affect the entitlement of the paying superannuation fund to the tax free earnings while in pension phase – or reduce the portion of which earnings which are treated as being tax free).  It could be that even if there is a reduction in the portion of earnings – this may not be a significant reduction in certain circumstances.

Tax Reg 995-1.03 permits a fund member receiving a pension to elect to have a particular payment from the superannuation interest supporting the pension to not be taxed as a superannuation income stream benefit.  If a payment is not taxed as a superannuation income stream benefit it must be taxed as a superannuation lump sum benefit.  As such, the payment, while being taxable, will incur tax at 0% if the payment is within the “low cap” threshold of the fund member and will incur tax if the payment is not within the cap.  The low cap threshold is currently $195,000 and is a lifetime cap.  Consequently, the available cap will be reduced by the amount of previously received payments.

As the payment is not a partial commutation but a pension payment (the effect of Tax Reg 995-1.03 is to alter the taxation treatment of the payment and says nothing as to the consequences of the payment under the SIS legislation), the payment will still count for the pro-rata minimum payment rule.  Unfortunately the 10% rule still applies: the payment (when added to previous payments from the superannuation interest) cannot exceed 10% of the pension account balance at the start of the pension or last 1 July.

The ATO has suggested (or raised the possibility) that applying the Reg 995-1.03 election may adversely affect the calculation of the ratio used to determine the amount of investment earnings which is treated as being exempt from taxation (often referred to as the amount of the deduction for exempt current pension income).  This adverse aspect may be reduced by only exercising the Reg 995-1.03 right at the end of the financial year rather than at the start of the financial year.  The reason being is that the ratio used to determine the exempt portion of investment earnings is determined on a time and money weighted basis.  Consequently making the election at the end of the financial year will reduce the weighted impact of the payment on the calculation.  

Lastly – what of Part IVA?  For once, we have a reasonable confident response.  The election is made pursuant to an express right conferred by taxation legislation.  So Part IVA cannot apply.

Reference: 1012925066548