A superannuation income stream ceases when there is no longer a member who is entitled, or a dependant beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit from a superannuation interest that supports a superannuation income stream.

When a superannuation income stream ceases is determined by reference to the particular superannuation funds’ governing rules, the requirements of the SIS Regulations and the facts and circumstances fo the payment of the member’s, or dependant beneficiary’s benefits.

The common circumstances in which a superannuation income stream ceases are outlined below.

Failure to comply with the pension rules – note that if the pension rules are not met and the trustee is taken not to have been paying a superannuation income stream at any time during the income year in which the requirements are not met.

If the requirements are again met in the following year this results in the commencement of a new superannuation income stream.

By operation of the payment standards of the SIS Regulations (e.g., where a death benefit pension is paid to a child of the deceased who attains the age of 25 (unless the child has a relevant disability));

Exhaustion of capital;

Commutation (though not necessarily a partial commutation); or

Death of the relevant member (although note that, from 1 July 2012, the legislation has been amended to allow the pension exemption to continue following the death of a pension member so that the fund can dispose of pension assets on a tax-free basis to pay death benefits as soon as practicable following the member’s death).

Example: Failure to meet minimum annual payment requirement – Cessation of superannuation income stream

John is a member of the KJL Superannuation Fund (an SMSF) and commenced an account based pension in a prior year.

At the start of the 2012/13 year, the trustee of the KJL Superannuation Fund calculates that the minimum annual payment required to be made under Schedules 7 of the SIS Regulations for that year is $1,000, but the trustee only make a single payment to John of $50..

As this amount is less than the minimum annual payment required, the superannuation income stream has not met the requirements of the SIS Regulation for the 2012/13 year, and so the superannuation income stream ceases for income tax purposes a the beginning of this income year ( and the $50 payment is a superannuation lump sum).

This is the case even if John remains entitled to receive a payment for the superannuation fund in relation to the pension under the governing rules of the superannuation fund, or under general trust law concepts, in future years.

If the relevant requirements are complied with in the 2013/14 year, this results in the commencement of a new pension.

This Ruling explains when a ‘superannuation income stream’ (i.e., pension) commences and when it cease, and consequently when a superannuation income stream is payable.

These concepts are relevant to determine the income tax consequences for both the superannuation fund (including the availability of the pension exemption) and the member in relation to superannuation income stream benefits paid.

The Ruling primarily focuses on ‘account based pensions’ and ‘transition to retirement income streams’.

Ruling
There is an ‘income stream’ (within the definition of ‘superannuation income stream’), if a superannuation fund trustee has a liability to pay to a member “a series of periodic payments that relate to each other over an identifiable period of time”.
The payments need not be always paid at the same, recurring intervals, and may also vary in amount.

Also, a liability to make a single payment each year for a number of years can satisfy as a liability to pay a member a series of payments.

However, a liability to make a single payment for one year will not result in a series of payments and thus will not quality as an ‘income stream’.

When a superannuation income stream commences
All the capital which is to support a superannuation income stream must have been added to the relevant superannuation interest from which the superannuation income stream is to be paid (by way of contribution or rollover) before the income stream can commence.

Subject to this, a superannuation income stream commences on the first day of the period to which the first payment of the superannuation income stream relates (the ‘commencement day’).

When the commencement day occurs must be determined by reference to:
• the terms and conditions of the superannuation income stream agreed by the trustee and member;
• the rules of the superannuation income stream as set out in the governing rules of
the superannuation fund (e.g., the trust deed); and
• the relevant regulations of the SIS Regulations 1994.

The commencement day may occur before the due date of the first payment, depending on the rules which govern the superannuation income steam, but the commencement day cannot precede the date of the member’s request or application.

Further, the commencement day cannot occur prior to:
• the day established as the commencement day in the terms and conditions agreed between
the member and the trustee that will govern the superannuation income steam; or
• in circumstances where a member or dependant beneficiary becomes entitled to
the superannuation income stream under the governing rules of the superannuation fund,
the time at which the entitlement to start the income stream arises.

Once a superannuation income stream commences it is payable (that is, there is an obligation to pay superannuation income stream benefits from that superannuation income stream) until such time as that superannuation income stream ceases.

This remains true event if the member dies before any payment is due to be made under the terms of the arrangement.

An adjustment arises for GST purposes when a financier exercises its right to terminate a hire purchase (HP) agreement due to a default by the hirer and the outstanding instalment are no longer payable.

Facts
A financier enters into a HP agreement with a customer (the hirer) for the supply of goods on or after 1 July 2012.
Under the HP agreement, the financier makes two taxable suppliers (i.e., a supply of goods and a supply of credit), and payments for these suppliers are made by the hirer to the financier in instalments.

The financier accounts for GST on an accruals basis and has attributed the GST payable on the suppliers of the goods and credit under the HP agreement to an earlier tax period.

In a later tax period, there is a genuine dispute between the parties and the hirer defaults. so the financier exercises its right to terminate the HP agreement.

Under the HP agreement, although amounts in arrears up to the date of termination remain payable, the future outstanding instalments are no longer payable.

To compensate the financier for any loss under the HP agreement, it is entitled to a termination amount equal to the discounted future outstanding amounts reduced by the net proceeds of resale or rehiring.

A taxpayer may have to make a GST adjustment if GST on a supply was attributable to an earlier tax period, and adjustment event occurs so that the ‘previously attributed GST amount for the supply no longer correctly reflects the amount of GST on the supply (the ‘corrected GST amount’). Refer to S.19-40.

Upon termination of the HP agreement, the financier is no longer entitled to the future instalments that would have become due and payable if the agreement was still on foot.

Consequently, the consideration for the supply of goods and credit made under the HP agreement is reduced as the future instalments are no longer consideration for these supplies.

Therefore, the change (i.e., the reduction) in consideration for the suppliers of goods and credit under the HP agreement is an adjustment event (repossession of goods under a HP agreement is also an adjustment event – refer GSTR 2000/29).

As a result of the adjustment event, the previously attributed GST for the supplies (i.e., of goods and credit under the HP agreement) in no longer an accurate reflection of the consideration for the supplies (because the consideration has been reduced).