Edited version of private advice

Authorisation Number: 1051750580196

Date of advice: 11 September 2020

Ruling

Subject: Pension tax bonus

Question

Does the allocation of a Pension Tax Bonus (PTB) by the taxpayer to a member's account constitute an assessable contribution such that it forms part of the assessable income of the taxpayer for the purposes of

(a)  section 295-160 of the Income Tax Assessment Act 1997 (ITAA 1997), or

(b)  section 295-190 of the ITAA 1997?

Answer

(a)  No.

(b)  No.

This ruling applies for the following periods:

A number of income years

The scheme commenced during:

An income year

Relevant facts and circumstances

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

Background

The taxpayer is a complying superannuation fund.

The taxpayer is managed by a trustee company (the Trustee).

Unit prices for each investment option are calculated daily by the taxpayer's custodian (the Custodian) and include a tax provision for current tax expenses on realised capital gains/losses and deferred tax expenses on unrealised capital gains/losses. The tax provision is not allocated against a reserve account and there is no cash set aside by the Custodian or the taxpayer for these tax amounts.

Further to the relevant income tax return lodgement, the taxpayer and Custodian will make adjustments to the taxpayer's tax provisions to reflect the true tax position for each investment option for that income year, as part of the annual tax true-up process.

For financial reporting purposes, the deferred tax liability or deferred tax asset (DTL/DTA) is recorded in the Statement of Financial Position pursuant to accounting standard AASB 112 Income Taxes.

The taxpayer maintains a number of reserve accounts, however, none of these reserves reflect monies set aside for the tax liabilities of the Fund (current or deferred) and allocation of income tax does not result in a debit to any of these reserves.

The taxpayer's trust deed only provides for the establishment of reserve accounts and does not require any DTL/DTA provision to be allocated to and from a reserve account.

Purpose of the Pension Tax Bonus

The taxpayer proposes to implement a Pension Tax Bonus (PTB) for eligible members moving from an accumulation account or Transition to Retirement (TTR) account to a pension account.

The purpose of the PTB is to compensate members who move from the accumulation phase to the pension phase of the taxpayer for their relevant proportion of the reduction in the taxpayer's DTLs due to this transition.

In the accumulation phase and TTR, deferred tax on unrealised capital gains (DTLs) is notionally applied to members' account balances through the unit pricing process to the extent that the members were exposed to those assets as part of their investment option choices.

When a member moves to the pension phase of the taxpayer, the DTL of the taxpayer is reduced and the ECPI proportion of the taxpayer increases.

Accordingly, the PTB seeks to allocate this benefit to individual members at the time of commencement of their pension income stream.

The PTB is not a:

·         payment under section 65 of the Superannuation Guarantee (Administration) Act 1992 for the purposes of item 3 of the table in section 295-160

·         payment under section 61 or 61A of the Small Superannuation Accounts Act 1995 for the purposes of item 4 of the table in section 295-160

·         roll-over superannuation benefit that an individual is taken to receive under section 307-15 for the purposes of items 2 and 2A of the table in subsection 295-190(1)

·         taxable component of a directed termination payment (within the meaning of section 82-10F of the Income Tax (Transitional Provisions) Act 1997) for the purposes of item 3 of the table in subsection 295-190(1).

No PTB will be allocated to members who move to the pension phase from an accumulation or TTR investment option that does not carry a DTL (e.g. Cash investment options).

The PTB is not a flat dollar amount, rather it varies depending on the accumulation investment option from which a member transfers to the pension phase.

The inputs and method used to calculate the PTB represents the member's investment options during the accumulation phase and is proportionate to the duration of their membership. Weighting factors and PTB rates vary for each investment option and are representative of the DTL level within each option.

Relevant legislative provisions

Section 295-160 of the Income Tax Assessment Act 1997

Section 295-190 of the Income Tax Assessment Act 1997

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

(a) Section 295-160 contributions and payments

Section 295-160 provides that the assessable income of a complying superannuation fund (such as the taxpayer) in a year of income includes the following contributions or payments received by it in the income year:

·         contributions to provide superannuation benefits for someone else, except a contribution that is a roll-over superannuation benefit (per item 1 of the table in section 295-160)

·         payments under section 65 of the Superannuation Guarantee (Administration) Act 1992 (per item 3 of the table in section 295-160), and

·         payments under section 61 or 61A of the Small Superannuation Accounts Act 1995 (per item 4 of the table in section 295-160).

As the PTB is not a payment under section 65 of the Superannuation Guarantee (Administration) Act 1992 or apayment under section 61 or 61A of the Small Superannuation Accounts Act 1995, it will not be included in the assessable income of the taxpayer for the purposes ofitems 3 or 4 of the table in section 295-160.

In determining whether the PTB is assessable income of the taxpayer for the purposes of item 1 of the table in section 295-160, it is necessary to first consider whether it is a contribution.

There is no definition of 'contribution' in the ITAA 1997. The Commissioner's view of the ordinary meaning of contribution in the context of a superannuation fund in the ITAA 1997 is provided in Taxation Ruling TR 2010/1 Income tax: superannuation contributions.

Paragraph 4 of TR 2010/1 states:

In a superannuation context a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all the members in general.

Paragraph 10 of TR 2010/1 states:

The capital of a superannuation fund may be increased directly by:

·         transferring funds to the superannuation provider;

·         rolling over a superannuation benefit from another superannuation fund;

·         transferring an existing asset to the superannuation provider (an in specie contribution);

·         creating rights in the superannuation provider (also an in specie contribution); or

·         increasing the value of an existing asset held by the superannuation provider.

Further, paragraph 11 of TR 2010/1 states:

The capital of a superannuation fund can also be increased indirectly by:

·         paying an amount to a third party for the benefit of the superannuation provider;

·         forgiving a debt owed by the superannuation provider; or

·         shifting value to an asset owned by the superannuation provider.

The PTB is referrable to members' past investment returns as it is a reversal of the earlier discounting of investment returns, that is, the provision for income tax liability in relation to unrealised capital gains that accrued to the taxpayer prior to members commencing their pension (i.e. deferred tax liability (DTL)).

The PTB subsequently allows a portion of the value attributed to the reduction in the DTL to be allocated to the relevant member at the time of commencement of a superannuation income stream that is in retirement phase.

The taxpayer as a whole is in the same net asset position regardless of the PTB. The PTB merely acts to ensure a more fair and equitable allocation of tax between members.

The PTB does not fall within any of the categories listed in paragraphs 10 and 11 of TR 2010/1 and as such, does not constitute a direct or indirect increase to the capital of the taxpayer.

Therefore, the allocation of the reduction in DTL to members commencing a superannuation income stream that is in retirement phase will not result in a direct or indirect increase to the taxpayer's capital and thus does not satisfy the requirements in item 1 of the table in section 295-160.

As the PTB does not fall within any of the items in the table in section 295-160 the allocation of the PTB by the taxpayer to a member's account does not constitute an assessable contribution and as such does not form part of the assessable income of the taxpayer for the purposes of section 295-160.

(b) Section 295-190 Personal contributions and roll-over amounts

Section 295-190 provides that the assessable income of a complying superannuation fund includes:

·         personal contributions for which the contributor has given the fund a valid notice of intent to claim a deduction for the contributions (per item 1 of the table in subsection 295-190(1))

·         roll-over superannuation benefits that an individual is taken to receive under section 307-15 (per items 2 and 2A of the table in subsection 295-190(1)), and

·         the taxable component of a directed termination payment (within the meaning of section 82-10F of the Income Tax (Transitional Provisions) Act 1997) (per item 3 of the table in subsection 295-190(1)).

Given that the PTB is not a roll-over superannuation benefit or a taxable component of a directed termination payment, it will not be included in the assessable income of the taxpayer for the purposes ofitems 2, 2A or 3 of the table in subsection 295-190(1).

In determining whether the PTB constitutes assessable income of the taxpayer for the purposes of item 1 of the table in subsection 295-190(1), it is necessary to consider whether it is a contribution.

On the basis that the PTB is not a contribution, as outlined above, it will not be an assessable contribution for the purposes of item 1 of the table in section 295-190.

As none of the items in the table in section 295-190 are satisfied, the allocation of a PTB by the taxpayer to a member's account does not constitute an assessable contribution and as such does not form part of the assessable income of the taxpayer for the purposes of section 295-190.