Exempt income - segregated current pension assets

Does the exemption provided by section 282B of the Income Tax Assessment Act 1936 (ITAA 1936) for exempt pension income continue to apply after the death of a sole member of a superannuation fund who was in receipt of a pension prior to his death?

No, the exemption provided by section 282B of the ITAA 1936 for exempt pension income does not continue to apply after the death of the sole pension recipient of a superannuation fund.

The fund is a complying superannuation fund.

The fund has a single member.

The fund was paying a pension to the member.

The member of the fund died.

The trust deed of the fund does not provide for reversionary pensions or annuities to be paid. On the death of the member, any remaining monies are payable as a lump sum to the member's 'Nominated Dependant.'

Section 282B of the ITAA 1936 allows an exemption from tax for the amount of normal assessable income of a complying superannuation fund that is derived from segregated current pension assets.

Section 273A of the ITAA 1936 provides that assets are 'segregated current pension assets' if: (a) the assets are invested, held in reserve or otherwise being dealt with at that time by the fund for the sole purpose of enabling the fund to discharge the whole or part of its current pension liabilities as they become due; and (b) the trustee of the fund obtains an actuary's certificate before the certificate date to the effect that the amount of the assets, if accumulated after the particular time at the rate the actuary expects will be the rate of the fund's earnings on those assets, would provide the amount required to discharge in full the whole or the part, as the case may be, of the current pension liabilities as they fall due.

This means that assets are current segregated pension assets only when they are held or invested for the purpose of paying current pension liabilities. A 'current pension liability' is defined in subsection 267(1) of the ITAA 1936 as a liability, including a contingent liability, of the fund to make a payment in respect of a pension payable by the fund at the particular time. In other words, once a fund no longer has any current pensions in payment and there is no provision for a contingent pension to commence, the fund no longer requires current pension assets.

Where a fund ceases to have a current pension liability due to the death of a sole member with no contingent pension payable, the assets cease to be 'current pension assets' and the income is no longer exempt pension income. As a result the exemption provided for by section 282B of the ITAA 1936 ceases to apply.