The vigilant professional adviser

Experienced participants in the tax industry would be aware of the need for constant vigilance, even where a pronouncement from the Commissioner of Taxation may appear benign.
This is evident from the recently issued draft tax ruling TR 2011/D3 which considers when a superannuation pension commences and ceases. At face value these may seem relatively straight forward questions, however an examination of the Commissioner's conclusions will quickly indicate to the contrary. The key issues surround the circumstances in which a pension may cease. The identification of that time is critical because the income generated from assets which discharge pension liabilities is exempt income. When the pension ceases the superannuation fund returns to the accumulation phase and the previously exempt income becomes assessable.
The greatest concern to taxpayers is likely to be the conclusion that a pension ceases:

1. Upon the death of the pension recipient, unless there is a reversionary beneficiary who becomes automatically entitled to the pension. This appears to indicate that there must be a specific nomination of a reversionary beneficiary by the pension recipient; a situation where the beneficiary of the deceased was empowered to receive a pension, but would have to stipulate a desire to commence such a pension, would seem to result in the original pension ceasing and a new pension commencing. In these circumstances the fund would for a brief time, return to accumulation phase and therefore any capital gains arising from the realisation of assets would be subject to tax. Many superannuation pensioners do not nominate an automatic reversionary beneficiary but rather leave the option open for such a beneficiary to commence a pension. Those seeking to minimise the amount of income ‘counted' for the purposes of Centrelink income tests would very often adopt that approach. If the use of the term ‘automatic' in the draft ruling means that a reversionary beneficiary must be nominated under the original pension, and the Commissioner's interpretation of the law is correct, there is the potential for significant adverse implications for taxpayers. It then may be necessary to address the question as to whether that was the intention of the relevant legislation.
2. If the pension standards were breached - say, for an account based pension paying less than the minimum annual drawdown amount - the ruling indicates that this would cause the pension to cease and a new pension to commence if the breach was rectified in a subsequent year.

It would seem that the ramifications of such a breach would be:

• the fund reverting to accumulation phase for the full year in which the breach occurs,
• a breach of the superannuation industry regulations if the draw-downs are lump sums for which there is not a condition of release. This raises the possibility of a fund becoming non-complying.

That outcome must surely be ruled out by the Commissioner where all that may have occurred is a shortfall in benefit withdrawals due to administrative error.