Disability superannuation benefit: roll-over - commencement of an account-based pension

Is there a transfer for the purposes of subsection 307-5(8) of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore a roll-over superannuation benefit when a member of a complying superannuation fund decides to commence an account-based pension?

No. The commencement of the account-based pension is not treated as a payment for the purposes of subsection 307-5(8) of the ITAA 1997 and accordingly there is no roll-over superannuation benefit.

A member of a complying superannuation fund has an accumulation account.

The member has no other superannuation interest in the superannuation fund.

The member suffers ill-health and has ceased work.

The member, being less than preservation age, applies to receive a benefit from the fund on the basis that the member has satisfied the permanent incapacity condition of release.

The trustee is satisfied that the member suffers ill-health and is unlikely to engage in gainful employment for which the member is reasonably qualified by education, experience or training.

Two medical practitioners have certified that the member is incapable of ever being gainfully employed in a capacity for which the member is reasonably qualified because of education, experience or training.

The member elects to be paid an account-based pension using the entire balance of the accumulation amount.

The fund trustee commences to pay an account-based pension to the member and 'transfers' the assets supporting the member's pension to the fund's segregated current pension assets.

Section 307-145 of the ITAA 1997 applies to increase the tax free component of a superannuation lump sum that is a disability superannuation benefit payable to a member of a superannuation fund.

Some funds are maintained with distinct 'sub-funds' that separately comprise the assets representing the interests of the members in accumulation phase (the 'accumulation sub-fund') and the interests of the members receiving superannuation income stream benefits (the 'pension sub-fund'). The 'pension sub-fund' represents the fund's segregated current pension assets.

The Commissioner has been asked if a superannuation lump sum should be taken to be paid to the member under subsection 307-5(8) of the ITAA 1997 where a member's benefits are 'transferred' from the 'accumulation sub-fund' to the 'pension sub-fund' in facilitating the commencement of an account-based pension to the member. If this 'transfer' is considered the payment of a superannuation lump sum then section 307-145 of the ITAA 1997 could be applied to increase the tax free component of that superannuation lump sum. However, as explained in the paragraphs that follow there is no payment of a superannuation lump sum in these particular circumstances.

Subsection 307-5(8) of the ITAA 1997 applies when an amount is transferred from one superannuation interest to another superannuation interest within the same superannuation plan.

In such a case, the transfer is treated as a payment in determining whether the transfer is a superannuation benefit or a roll-over superannuation benefit. When subsection 307-5(8) of the ITAA 1997 applies, it can operate in conjunction with sections 307-5, 307-15 and 306-10 of the ITAA 1997 to treat the transferred amount as a superannuation benefit and also a roll-over superannuation benefit. This is known colloquially as an internal roll-over.

The expression internal roll-over is not defined for the purposes of Division 307 of the ITAA 1997. However, it is clear from the wording in subsection 307-5(8) of the ITAA 1997 that an internal roll-over is dependent on the concept of a superannuation interest which is used in the ITAA 1997.

This represents a departure from former Subdivision AA of Division 2 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936), in which the expression internal roll-over amount was defined by reference to highly specific sets of circumstances. Those provisions therefore can provide little guidance in determining what an internal roll-over is for the purposes of the ITAA 1997.

Merely commencing a superannuation pension from an existing superannuation interest does not involve a transfer of benefits between superannuation interests. A pension payable on permanent disability is merely one of a range of benefits payable from the member's superannuation interest. While in this case there may be, for accounting purposes, a segregation of the assets supporting the member's interest, the member does not have two separate interests in the superannuation fund between which anything can be said to be transferred.

This is borne out by the AAT's decision in Case 18/97, AAT Case 11,709 (1997) 35 ATR 1074; 97 ATC 227. In that case the taxpayer elected to be paid a pension from the fund in accordance with the provisions of the fund's trust deed. This involved her accumulated credit being applied by the Trustee towards providing a pension.

It was argued that the accumulated credit could be classified as an eligible termination payment or ETP (as defined in former subsection 27A(1) of the ITAA 1936) and that this ETP was rolled back into the same fund. It should be noted that this pre-dated the amendments relating to internal roll-overs which applied to certain payments made on or after 1 July 2001.

The AAT held that there was no ETP that was rolled-over back into the fund.

Regulation 307-200.05 of the Income Tax Assessment Regulations 1997 provides that an amount that supports a superannuation income stream is always to be treated as a separate superannuation interest.

This regulation applies to ensure that an interest supporting a superannuation income stream is kept separate from any other interest a member has in a fund. It does not operate to treat the superannuation income stream interest as a separate interest from the interest in which the member's benefits accumulated. It has no application when there is no other superannuation interest as in this case when the superannuation pension paid by the fund trustee is the only superannuation interest.

In view of the above there is no transfer of benefits between superannuation interests within the same superannuation plan which can be treated as a superannuation lump sum to which section 307-145 of the ITAA 1997 can be applied.