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In the ATO's fact sheet Transfer balance account (QC 54354), under the heading 'Failure to comply with pension or annuity standards', in the Example dealing with Yukari, the ATO advises that if the self-managed superannuation fund (SMSF) trustee wishes to claim the pension exemption in relation to Yukari's pension in the 2019 year, Yukari must cease her income stream and start a new account-based income stream that complies with the relevant pension rules or standards.

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Note that, in this case, no debit to Yukari's transfer balance account would arise for the commutation of her pension, as a debit would have already arisen on 30 June 2018 as a result of Yukari's pension no longer being in retirement phase. Furthermore, when Yukari commences her new pension, a credit would arise to her transfer balance account.

The above approach (that is, in the ATO's fact sheet) is also supported by the Explanatory Memorandum (EM) to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (that is, the Bill that introduced the transfer balance cap) – refer to paragraphs 3.141 and 3.142 of the EM.

The consolidated Ruling now clearly states that where a superannuation income stream ceases for income tax purposes because it did not meet the requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR 1994), a new superannuation income stream cannot automatically commence in a future year. It will not be a superannuation income stream for income tax purposes from the time of cessation, even if the member remains entitled to receive payments from the superannuation fund.

This is because the SISR 1994 states that the rules relating to a pension must 'ensure' the requirements are met. If they have not been met in a particular year, they can no longer 'ensure' that the requirements will be met.

For the member to receive a superannuation income stream, any income stream payable from the superannuation interest must cease (for example, by commutation) and a new superannuation income stream must commence under the principles in paragraphs 9 to 13 of the Ruling.

The ATO's Ruling does not make it clear as to what the commencement time of the (deemed) new pension (or income stream) is in the following income year – we suspect that the commencement time of the new pension in the following income year would be 1 July (that is, at the beginning of the year). In this regard, we suggest that the ATO makes this clear in its final Ruling.

However, based on the ATO's more recent guidance in order to regain access to the pension exemption in the following income year, the recipient member is required to fully commute their existing pension and then commence a new retirement phase pension.

In these circumstances it would appear the same pension would end up being commuted twice – firstly, on 1 July of the income year in which the pension does not satisfy the pension standards, and secondly, when the member actually commutes the pension in order to gain access to the pension exemption (that is, by commencing a new pension).

We suggest that this issue is clarified in the final Ruling on when a superannuation income stream commences and ceases.

It should be noted, however, that the cessation for income tax purposes is not a commutation of the pension. Even though the superannuation income stream may have ceased the member may still be entitled to receive payments from the superannuation fund in respect of the income stream under the governing rules of the superannuation fund, or under general trust law concepts.

These payments will be superannuation lump sums for the purpose of determining the tax-free and taxable components, and the income from assets supporting the income stream will not qualify as exempt current pension income.

As explained above at the response to Issue 1 of this Compendium, for there to be a superannuation income stream that complies with the relevant SISR requirements in future years, any income stream that is still payable from the interest which supported the superannuation income stream must cease. This may occur via commutation of the income stream. A new income stream must then be commenced that meets all of the relevant SISR requirements.

We think that the wording used in the paragraph leaves it open to include an SFT where the trustee of the original fund is also the trustee of the successor fund, and note that the trustee would still be acting in a different capacity in that context.

Two possible interpretations of the operation of the SFT provisions appear open:

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there is no power to transfer an income stream member as part of an SFT, and thus consent would be required from each and every income stream member (to allow the commutation of his or her commutation) as part of the implementation of an SFT, or

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the relevant income streams do not cease and recommence.

We submit that the first of these interpretations would render most large SFTs unworkable. Further, the second interpretation gives rise to significant uncertainty as to the tax treatment of amounts paid by the closing fund to the ongoing fund in an SFT that reflect the value of an income stream member's liabilities.

In light of this, we consider that the ATO view as expressed in the draft Ruling represents an appropriate compromise. However, we submit that, as part of finalising the draft Ruling, the ATO should liaise with the Australian Prudential Regulation Authority (APRA) to provide broader guidance to the industry that better reconciles the provisions in the SISA and the SISR 1994 and the tax legislation. This guidance could, for example, make clear that APRA considers the member's income stream in the closing fund can cease (or be commuted) without the member's consent in the context of an SFT.

This Ruling sets out the Commissioner's view that under an SFT a member's superannuation income stream will cease for income tax purposes in the original fund.

APRA would be the appropriate agency to seek guidance from on the SFT implications under the SISA and SISR 1994.

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commutation of the existing income stream by the closing fund, and

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commencement of the new income stream by the ongoing fund.

Subject to the 2 funds carefully monitoring the quantum of income streams paid in the period up to the SFT date and after the SFT date, the ATO view may also result in issues in relation to the minimum pension requirements.

Based on acceptance of the views expressed in relation to SFTs in the revised TR, we recommend that the ATO provides additional commentary in the revised TR or in other guidance issued at the same time as the revised TR that:

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specifically notes the additional reporting and minimum pension implications that arise from the ATO view, and

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provides administrative relief (in the SFT protocol or similar) that

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relieves the closing fund and ongoing fund from any redundant elements of this reporting (while the reporting of the member's closure of account in the closing fund and opening of account in the ongoing fund is important and valuable to the member, the reporting of the 'commutation value' by the closing fund and the 'commencement value' by the ongoing fund would appear redundant), and

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for retirement phase income streams, ensures that where the combined income stream payments made by the 2 funds in the year in which the SFT occurs exceeds the minimum pension requirement had the closing fund continued to exist until year-end, both the closing fund and the ongoing fund will be entitled to treat the income streams as retirement phase income streams for the purposes of their respective exempt current pension income calculations for the period up to the SFT date (for the closing fund) and for the period from the SFT date to the ongoing fund's year-end (for the ongoing fund).

We submit that such relief is appropriate, in that it would remove unnecessary compliance costs (and potential income tax liabilities) for funds and fund members.

The Successor and intra fund transfer reporting page (QC 56421) on our website addresses the implications for an SFT of the minimum payment requirements for a superannuation income stream.

Requests for administrative relief are outside the scope of this update to the Ruling.

We note that this legislation may have implications for some of the comments in the draft Ruling. In order to ensure consistency, we suggest that the ATO defers finalisation of the draft Ruling until the approach adopted in this proposed legislation is known.

The final consolidated Ruling applies to pensions that satisfy subregulation 1.06(1) and paragraph 1.06(9A)(a) of the SISR 1994, which are referred to as 'account-based income streams'.

As both capped defined benefit income streams and the transfer balance cap implications of a superannuation income stream commencing and ceasing are outside the scope of this Ruling, we do not consider it necessary to delay publication of the final Addendum.

We also note that the exposure draft Explanatory Statement for the Treasury Laws Amendment Instrument 2024 Successor fund transfers and capped defined benefit income streams, released for public consultation on 3 April 2024, acknowledges that the original superannuation income stream ceases and a new one commences in the successor fund.