Edited version of your written advice

Authorisation Number: 1051222473595

Date of advice: 16 May 2017

Ruling

Subject: Payment made as soon as practicable

Question

Is a tax exemption available on pension earnings of a self-managed superannuation fund in the 2010-11 to 2016-17 income years?

Answer

No.

This ruling applies for the following periods

Income year ended 30 June 2011

Income year ended 30 June 2012

Income year ended 30 June 2013

Income year ended 30 June 2014

Income year ended 30 June 2015

Income year ended 30 June 2016

Income year ending 30 June 2017

The scheme commenced on

1 July 2010

Relevant facts and circumstances

The Superannuation Fund (the Fund) is a self-managed superannuation fund.

The Fund had one member (the Deceased).

The Deceased passed away in the 2009-10 income year.

The Fund was in full pension mode.

The beneficiaries under the Deceased's will were their children.

The Deceased's child became the executor of the Deceased's estate and the Deceased's legal personal representative.

The Deceased's child attempted to find out the Fund's assets and liabilities in order to lodge outstanding tax returns and make payments from the Fund.

Just prior to death the Deceased had remarried and their spouse was in receipt of the Fund's correspondence.

In the 2010-11 income year the Deceased's child requested the Deceased's spouse to forward missing bank statements for the Fund without success.

The Deceased's child also attempted to obtain information from the Fund's accountant who, at the time of the Deceased's death, was based in another state without success. A complaint with Chartered Accountants was filed in the 2011-12 income year.

The Deceased's child then received a letter from the Fund's previous accountant in the 2012-13 income year stating that they were no longer willing to act on the Fund's behalf due to communication issues.

Upon receipt of some information from Fund's previous accountant work was commenced on lodging the Fund's outstanding tax returns. An initial meeting was held with the Fund's new accountant in the 2011-12 income year.

During the 2012-13 income year some information was obtained from lawyers.

The Deceased's child contacted the banks and share registry but was having difficulties obtaining the required information.

In the 2015-16 income year the Deceased's child replaced the Deceased's child as the executor of the Deceased's estate and the Deceased's legal personal representative.

The Deceased's child followed up on the information requests upon his appointment and after significant effort was able to obtain the majority of outstanding information.

The Fund's 2010 tax return was lodged during the 2016-17 income year.

Until the 2016-17 income year neither the assets nor liabilities of the Fund could be reasonably estimated.

The Fund had invested in shares in Australian listed companies, units in Australian listed unit trusts, units in an Australian unlisted unit trust and held cash in a number of bank accounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-385

Income Tax Assessment Act 1997 Section 295-390

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Further issues for you to consider

Not applicable.

Anti-avoidance rules

Not applicable.

Reasons for decision

Summary

Given the delays incurred in bringing the Fund to an administrable position and the facts presented, it has been considered that payments will not have been made 'as soon as practicable'. The Fund will not be entitled to tax exemption on pension earnings for the 2010-11 to 2016-17 income years.

Detailed reasoning

Superannuation Income Stream Benefit

The Income Tax Assessment Act 1997 (ITAA 1997) defines “superannuation income stream benefit” with reference to the Income Tax Assessment Regulations 1997 (ITAR 1997). The meaning of superannuation income stream benefit is set out in regulation 995-1.01.

Subregulation 995-1.01(3) of the ITAR 1997 provides:

(3) For the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act, if:

(a) a superannuation death benefit that is a superannuation lump sum is paid after the death of a person (the deceased) using only an amount from a superannuation interest; and

(b) immediately before the deceased's death, the superannuation interest was supporting a superannuation income stream payable to the deceased; and

(c)  the superannuation income stream did not automatically revert to another person on the death of the deceased;

the amount paid as the superannuation lump sum, to the extent it is not attributable to any amount (other than investment earnings) added to the superannuation interest on or after the deceased's death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased's death until as soon as it was practicable to pay the superannuation lump sum.

In other words, where a death benefit is paid using only an amount from the deceased's interest that previously supported a pension (and the interest was not reversionary) then the payment will be considered a payment of the original income stream benefit. This is on the condition that no other amounts (apart from investment earnings) have been added to the superannuation interest following the member's death, as is the case here.

However, the payment will only be a superannuation income stream benefit for the period between the member's death and 'as soon as it was practicable to pay the superannuation lump sum.'

The Explanatory Statement to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (the ES) gives an example which explains this. Example 3 of the ES states:

Arthur was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 September 2012. The income stream did not automatically revert to another person on Arthur's death and no amounts (other than investment earnings) were added on or after his death to the superannuation interest that was supporting the income stream.

After undertaking a claims staking process, the trustee of the fund determined that the entire value of the deceased member's benefits in the fund would be paid to the deceased's widow as a lump sum. On 20 December 2012, which was in the circumstances as soon as practicable after Arthur's death, a single lump sum of $100,000 was paid to the widow using only an amount from the relevant superannuation interest.

For the purposes of the earnings tax exemption, the $100,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2012 until 20 December 2012.

As Soon As Practicable

The words 'as soon as it was practicable' are not defined in the income tax legislation.

The Oxford English Dictionary defines "practicable" as meaning "able to be done or put into practice successfully".

The Australian Macquarie Dictionary defines the term as "capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible".

The Explanatory Statement to the to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (Cth) provides a number of examples of where, notwithstanding delay, the payment of a superannuation death benefit will be made "as soon as it was practicable" after a member's death.

You explained that a range of factors have hampered and delayed the payment of the Deceased death benefits in a timely manner.

The issue to be addressed is whether the payments have been made as soon as it was practicable following the Deceased's death.

In this case, the Deceased passed away during the 2009-10 income year and the Deceased's child became the executor of the Deceased's estate and the Deceased's legal personal representative attempted to find out the Fund's assets and liabilities.

We note that there was considerable delay in the organisation of the Fund's affairs.

It is noted that the Deceased's child was hampered by poor internet and phone access due to their rural area and family issues which restricted her time to chase the outstanding information

The various delays and challenges in finalising the administration of the Fund are not matters outside the control of the Deceased's legal personal representative.

Whilst the facts show some attempts to do all things necessary to properly and appropriately manage the affairs of the Fund, sufficient evidence as not been provided to indicate that benefits were made as soon as practicable

Given the delays incurred in bringing the Fund to an administrable position and the facts presented, it has been considered that payments will not have been made 'as soon as practicable'. The Fund will not be entitled to a tax exemption on pension earnings for the 2010-11 to 2016-17 income years.