Toolbox: One year relief to provide complying pensions

The 50-member rule

This rule, which was applicable from May 12, 2004, is contained in Superannuation Industry Supervision Regulations Div 9.2B, in particular reg 9.04F and 9.04I. The rule basically means a regulated superannuation fund with fewer than 50 members must not provide a defined benefit pension if:

(a) it is established on or after May 12, 2004, and its governing rules provide for the payment of a defined benefit pension; or

(b) it is established before May 12, 2004, and its governing rules are amended on or after May 12, 2004, to provide for the payment of a defined benefit pension (reg 9.04F(1)).

Certain public sector schemes are exempted from the rule.

A ‘defined benefit pension’ is a pension for tax purposes, other than a pension wholly determined by reference to particular life insurance policies or an allocated pension (and, from September 20, 2004, a market-linked pension).

The 50-member rule means that, subject to limited relief (see below), small funds (including self-managed superannuation funds (SMSFs)) can no longer provide the full range of pensions for their members. Providing a range of complying pensions, such as lifetime or life expectancy pensions, was one of the major areas of effective retirement planning for SMSF members, as complying pensions are not only assessed against the higher pension reasonable benefit limit, but are also 100 per cent exempt for social security assets test purposes.

One year limited relief

The SIS Regulations now provide a one-year transitional relief from the 50-member rule, by allowing superannuation funds, including SMSFs, to provide a defined benefit pension to a person who was member of the fund on May 11, 2004, if the following conditions are met:

n before July 1, 2005, the person retires on or after attaining age 55 or attains age 65;

n the person becomes entitled to a defined benefit pension after May 11, 2004, and before July 1, 2005; and

n the first pension payment is made within 12 months after the day when the person became entitled to the defined benefit pension (reg 9.04I(3)).

Despite the transitional rule, members close to retirement must consider their retirement options urgently if they wish to access a defined benefit pension, bearing in mind that the 100 per cent social security assets test exemption is only available for income streams that commence before September 20, 2004. Complying income streams that commence after that date, including market-linked pensions, only qualify for a 50 per cent assets test exemption.

Amending governing rules

A problematic issue for superannuation fund trustees is ascertaining whether altering the governing rules would establish a new entitlement in relation to a pension or existing pension.

For many funds, the governing rules may simply include a broad provision to the effect that the fund may pay a pension (with or without the additional proviso ‘in accordance with the SIS legislation’ or ‘as permitted by the SIS legislation’), without specifying the terms and conditions under which the pension may be paid.

A superannuation fund’s governing rules are defined widely in the SIS Act to cover any rules contained in a trust instrument, other document or legislation (or combination of them) or any unwritten rule governing the establishment or operation of the fund. The Australian Taxation Office (ATO) has issued Draft Superannuation Determination SD 2004/D1 that discusses this and related issues.

SD 2004/D1 points out that the 50-member rule will be triggered if a fund document or unwritten rule is amended, or a new document or unwritten rule is created, on or after May 12, 2004, to provide for payment of a defined benefit pension, including a resolution as to the terms and conditions on which a defined benefit pension is to be provided.

Accordingly, if a resolution establishing the terms and conditions on which a defined benefit pension is to be paid is made on or after May 12, 2004, the ATO considers that the governing rules of the fund are amended to provide for the payment of a defined benefit fund in terms of reg 9.04F(1)(a) and payment of the pension would be prohibited.

As another example, the ATO states that if the governing rules are altered in a way that results in a commutation and rollover of an existing pension, a new defined benefit pension cannot be provided.

Liang P Leow is co-author of the CCH Master Superannuation Guide.