Income stream products set for innovative changes as further tax concessions are considered - Income Tax

Income stream products set for innovative changes as further tax concessions are considered.

NEED TO KNOW

On 21 March 2017, the Federal Government released a draft version of the Treasury Laws Amendment (Innovative Superannuation Income Streams) Regulations 2017 (the Regulations), and accompanying explanatory statement, for public consultation.

The Regulations, which will come into effect on 1 July 2017, give effect to the retirement income strategy included in the superannuation reforms announced by the Federal Government in its 2016/2017 Budget.

Earnings tax exemptions will be available to superannuation funds and life insurance companies offering income stream products such as deferred products, investment-linked pensions and annuities and group self-annuitised products.

By incentivising providers to offer these products, the Regulations aim to remove barriers to innovation in retirement income stream products, and allow retirees to have more choice and better manage consumption and longevity risk.

SUMMARY OF REGULATIONS

The Regulations introduce a new set of income stream standards to the Superannuation Industry (Supervision) Regulations 1994. The standards aim to cover a range of products that are currently not considered pensions or annuities for the purposes of the Superannuation Industry (Supervision) Act 1993.

The elements of the income stream standards are set out below:

Benefit payments can only commence after a condition of release is satisfied, including once the primary beneficiary has retired, has a terminal medical condition, is permanently incapacitated or has reached the age of 65;
Benefit payments must be made annually, unless the income stream is a deferred superannuation income stream and payments have not commenced. These payments must be payable throughout the beneficiary's remaining lifetime;
Benefit payments cannot be unreasonably deferred after commencing. The standards set out rules for determining what is unreasonable, factoring in if payments depend on returns of an investment of assets supporting the benefit, or age or life expectancy; and
A cap is applied to the amount of capital that can be accessed through a lump sum commutation, or on a commutation of an amount that is then rolled over within the superannuation system, beginning on the 'retirement phase start day'.

Under the new Regulations, income streams that satisfy the new standards will now fall within the definition of 'superannuation income stream' in the Income Tax Assessment Act 1997. Accordingly, superannuation funds and life insurance companies that provide these products will be eligible for an earnings tax exemption on income from assets held to support these streams, where an interest in the income stream is held for an individual in the retirement phase. The recipients of payments from these income streams will similarly be entitled to tax concessions relating to superannuation benefit payments.

These Regulations mean that tax concessions will be available for provision of a number of less common products, including deferred products, investment-linked pensions and annuities and group self-annuitised products.

NEXT STEPS

The closing date for submissions commenting on the exposure draft Regulations and Explanatory Statement is 12 April 2017.

We are able to provide you with further information or guidance about the Regulations. The contacts listed to the right of this article can assist you with further information.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.