Superannuation technical subgroup: 9 March 2010

Superannuation technical minutes, March 2010

Meeting details

Venue:	Teleconference
Date:	9 March 2010
Start:	2.00pm	Finish:	5.00pm
Chair:	Steve Martin
Contact and Secretariat:	Cindy Baker	Contact phone:	(02) 6216 2762

Attendees

Steve Martin	Australian Taxation Office
Stuart Forsyth	Australian Taxation Office
Brett Peterson	Australian Taxation Office
Trevor Roberts	Australian Taxation Office
Andrew Lee	Australian Taxation Office
Gwen Miller	Australian Taxation Office
Andrew Allan	Australian Taxation Office
Cindy Baker	Australian Taxation Office
Chris Thomson (guest)	Australian Taxation Office
Anita Katsabanis (guest)	Australian Taxation Office
Sharon Russell (guest)	Australian Taxation Office
Liz Westover	Institute of Chartered Accountants Australia
Reece Agland	National Institute of Accountants
Michael Davision	CPA Australia
James Shattock (substitute)	National Tax and Accountants' Association
Martin Heffron	Taxation Institute of Australia
Anne-Marie Esler	Financial Planning Association of Australia Ltd
Dante De Gori (guest)	Financial Planning Association of Australia Ltd
Tony Keir	Association of Super Funds Australia
James Bond	Investment Financial Services Association
Rob Jeremiah	Small Independent Superannuation Funds Association
Meg Heffron	SMSF Professional Association of Australia
Peter Burgess	SMSF Professional Association of Australia
Michael Perry	Superannuation Australia Pty Ltd
Jennifer Batrouney S.C	Law Council of Australia
Heather Gray	Law Council of Australia
Andrew Boal	Australian Institute of Actuaries
Helen Brady	Australian Bankers' Association
Alex Purvis	Australian Securities and Investment Commission
John Dow	Australian Prudential Regulation Authority
Erica Lejins (substitute)	Treasury

Apologies

Andrew Gardiner	National Tax and Accountants' Association
David Kettlestrong	Association of Taxation and Management Accountants
Robert Hodge	Association of Super Funds Australia
David Shirlow	Investment Financial Services Association
Trevor Thomas	Treasury
Gus Gilkeson	Australian Bankers' Association

^[H2]Agenda items

Disclaimer

National Tax Liaison Group (NTLG) Superannuation Technical Sub-group (STS) agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

1.1 Open and introductions

The chair, Steve Martin opened the meeting and welcomed everyone to the first sub-group meeting of the year.

The chair introduced and welcomed:

ATO guests

¦ Chris Thomson (guest)

¦ Anita Katsabanis (guest)

Stand in members

¦ Alex Purvis, Australian Securities and Investments Commission (ASIC) - replacing Elizabeth Hristoforidis for a number of meetings.

¦ Erica Lejins, Treasury - standing in for Trevor Thomas.

¦ James Shattock, National Tax and Accountants Association (NTAA) - standing in for Andrew Gardiner.

¦ Dante De Gori - attended as a guest of Financial Planning Association (FPA).

¦ James Bond, Investment and Financial Services Association (IFSA) - replacing Daniel Caruso as the IFSA member.

Steve thanked Daniel for his past contribution to the forum.

The agenda was confirmed.

1.2 Previous minutes

Minutes of the 24 November 2009 were accepted.

However, one member mentioned that a submission from IFSA concerning ATO ID 2009/125 and the response given to item 6.3 of the November 2009 meeting was to have been sent to the ATO for discussion at this meeting. Some IFSA members are concerned with the Commissioner's interpretation that there is no transfer of benefits within a fund when a member commences a superannuation income stream.

This matter will be carried over to the next meeting.

1.3 Action items

Action item update

Action item	NTLGSPR 160609/4 Income protection policies: tax treatment relating to proceeds paid to fund trustee
Responsibility	ATO and Treasury
Status (or due date)	Action item: Closed The ATO has provided assistance to Treasury on this item. This is now a matter for Treasury to consider consistent with the government's priorities.
Action item	NTLGSPR 080909/01 Technical amendment What is the process for attaining a technical amendment generally and this issue specifically?
Responsibility	ATO
Status (or due date)	Action item: Closed TIES request ready for submission.

Meeting discussion

The chair sought confirmation from the relevant member that they considered action item NTLGSPR 080909/01 as closed.

The member confirmed this action item should be closed.

1.4 Update on recently published and withdrawn public rulings, practice statements and ATO IDs

Public rulings and determinations

Ruling topic	Contribution Ruling - Income Tax
ID no.	2702
Final reference no.	TR 2010/1
Published	25 February 2010
Ruling topic	Self Managed Superannuation Funds: the application of subsection 66(1) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) to contributions of assets to a self managed superannuation fund by a related party of that fund
ID no.	1981
Final reference no.	SMSFR 2010/1
Published	25 February 2010
Ruling topic	Self Managed Superannuation Funds: the scope and operation of subparagraph 17A(3)(b)(ii) of the SIS Act 1993
ID no.	2951
Draft reference no.	SMSFR 2009/D1
Planned final date	7 April 2010
Ruling topic	Self Managed Superannuation Funds: is an self managed super fund (SMSF) that holds trauma insurance considered to be in breach of the sole purpose test?
ID no.	3079
Draft reference no.	SMSFD 2009/D1
Planned final date	14 April 2010
Ruling topic	Superannuation income streams - when does an income stream commence, in what circumstances does it end?
ID no.	3189
Draft reference no.	Draft scheduled to be published 26 May 2010
Planned final date	22 December 2010
Ruling topic	Self managed superannuation funds: cashing of benefits in the form of a pension or annuity for the purposes of Division 6.3 of the Superannuation Industry (Supervision) Regulations 1994 (SISR)
ID no.	3160
Draft reference no.	Draft scheduled to be published 5 May 2010
Planned final date	12 January 2011
Ruling topic	Self Managed Superannuation Funds: duties or services which trustees, or directors of corporate trustees, of self managed superannuation funds are prohibited from being remunerated for under section 17A of the SIS Act 1993
ID no.	3144
Draft reference no.	Withdrawn
Reason for withdrawal	Topic has been withdrawn from the Public Rulings Program During development of this product it was determined that the issue does not represent major compliance issues when compared to other SMSF issues currently under consideration. It was further decided that resources should not be expended on the topic pending the outcome of the Cooper and/or Henry Reviews. Also, some guidance relating to application of the trustee remuneration prohibition was provided to the NTLG Superannuation Technical Sub-group meeting of 5 March 2007 (refer to item 5.3 of the minutes for that meeting).
Replacement product (or reason for no replacement)	The ATO will continue to monitor any compliance issues which may arise. Alternative products will be considered if further developments result in the need for further action.

Withdrawn ATO IDs

Product	ATO ID 2002/727
Title/subject	Superannuation contribution tax: Adjusted taxable income
Date withdrawn	27 November 2009
Product	ATO ID 2001/545
Title/subject	Superannuation contribution tax: Financial year used for reporting surchargeable contributions
Date withdrawn	27 November 2009
Product	ATO ID 2002/436
Title/subject	Superannuation: Non-quotation of a member's tax file number (TFN) for a particular superannuation account and the application of surcharge
Date withdrawn	27 November 2009
Product	ATO ID 2002/748
Title/subject	Superannuation fund - liability of family trust distribution tax on a distribution outside the family group
Date withdrawn	15 January 2010
Product	ATO ID 2002/410
Title/subject	Superannuation guarantee scheme: employment status
Date withdrawn	5 February 2010
Product	ATO ID 2001/14
Title/subject	Superannuation guarantee scheme: Long Service Leave Entitlements
Date withdrawn	5 February 2010
Product	ATO ID 2007/73
Title/subject	Superannuation Guarantee Scheme: Notional earnings base
Date withdrawn	5 February 2010
Product	ATO ID 2006/63
Title/subject	Notional Earnings Base: predecessor fund
Date withdrawn	5 February 2010
Product	ATO ID 2002/308
Title/subject	Superannuation Guarantee Scheme: Calculation of an employer's individual shortfall
Date withdrawn	5 February 2010
Product	ATO ID 2002/456
Title/subject	Financial year used for reporting surchargeable contributions, including superannuation guarantee shortfall components
Date withdrawn	5 February 2010
Product	ATO ID 2003/58
Title/subject	Termination payment tax: Request for Commissioner to remit termination payments surcharge payable
Date withdrawn	5 February 2010
Product	ATO ID 2001/319
Title/subject	Superannuation - request for another method of calculating surcharge for pre-1996 pensioners
Date withdrawn	19 February 2010
Product	ATO ID 2001/461
Title/subject	Superannuation - Request for approval of another method for surcharge calculations
Date withdrawn	19 February 2010
Product	ATO ID 2002/461
Title/subject	Superannuation Contributions Tax: allocation of surplus in the financial year ended 30 June 1997
Date withdrawn	19 February 2010
Product	ATO ID 2002/728
Title/subject	Superannuation contributions surcharge: Holder of the contributions
Date withdrawn	19 February 2010

Published ATO IDs

Product	ATO ID 2009/145
Title/subject	Income Tax: Superannuation benefits: CSS indexed pension partially funded by a roll-over
Date published	4 December 2009
Product	ATO ID 2009/151
Title/subject	Income Tax: Superannuation Product: One or two superannuation income streams
Date published	11 December 2009
Product	ATO ID 2010/5
Title/subject	Income Tax: Complying superannuation fund: deduction for increased amount of superannuation lump sum death benefit
Date published	8 January 2010
Product	ATO ID 2010/7
Title/subject	Income Tax: Self Managed Superannuation Funds: Tax treatment of future contracts
Date published	8 January 2010

Meeting discussion

Members were happy with the status of the ruling program, withdrawn and published ATO IDs.

No further comments received.

1.5 Litigation

Period to 1 February 2010

Since the last NTLG meeting held 24 November 2009, 14 litigation matters were finalised in the Superannuation area.

Of the 14 cases:

¦ six were withdrawn by the applicant

¦ four were finalised by section 42C order as a result of further information being supplied by the applicant

¦ three were finalised as a result of a settlement being reached

¦ one decision was favourable to the Commissioner which related to taxation of special income matter (see below).

FFWX and the Commissioner of Taxation [2009] AATA 657 completed its last day of hearing on 21 August 2009 and the decision was handed down on 1 September 2009. The decision was reviewed at the NTLG Superannuation Technical Sub-group meeting on 8 September2009. The applicant has appealed the decision and the appeal is to be heard by the Full Bench of the Federal Court on 4 March 2010.

Constitutional issues

Roy Morgan Research Pty Ltd and the Commissioner of Taxation [2009] AATA 702

At the last NTLG STS meeting, the ATO noted that the company had appealed the decision of the Tribunal in relation to the superannuation guarantee charge assessments. The company has subsequently filed notice of a constitutional issue in relation to the relevant Act.

Mythology Holdings Pty Ltd ACN 104 211 823 v Deputy Commissioner of Taxation

In an application to set aside a statutory demand, the company has filed notice of a constitutional issue.

The ATO remains strongly of the view that the relevant Act in both these matters is constitutionally valid and will continue to review employer arrangements as usual.

Neutral evaluations

A number of matters were resolved following a neutral evaluation by an officer of the Administrative Appeals Tribunal (AAT). While neutral evaluation is only one of a number of possible alternative dispute resolution processes, it has proven particularly helpful in these cases.

The AAT describes neutral evaluation as:

An advisory process in which a Tribunal member, officer of the Tribunal or another person appointed by the Tribunal, chosen on the basis of their knowledge of the subject matter, assists the parties to resolve the dispute by providing a non-binding opinion on the likely outcomes. Neutral Evaluation is used when the resolution of the conflict requires an evaluation of both the facts and the law. The opinion may be the subject of a written report which may be admissible at the hearing.

A link to the Neutral Evaluation Process Model [PDF 139 KB] is provided.

ASIC advisory notices

There have not been any advisory notices relevant to SMSFs since the last update.

Meeting discussion

The ATO summarised the litigation update and confirmed that appeal of the FFWX case on special income was heard in the Full Federal Court on 4 March 2010, with the decision reserved. That case is now known as Darrellan Pty Ltd as Trustee for the Henfam Superannuation Fund v. Federal Commissioner of Taxation.

The members were also advised that notice of a third constitutional challenge to the superannuation guarantee legislation had been filed, the applicant is On Call Interpreters and Translators Pty Ltd.

No further comments.

1.6 Technical questions raised by members

1.6.1 Application of the 10% test when leave entitlements due in June are paid in July

If a taxpayer's employment terminates in June 2009, but their annual and long service leave entitlements are not paid until July 2009, are those payments included in the maximum earnings as an employee test (the so called 10% test under section 290-160 of the Income Tax Assessment Act 1997 (ITAA 1997) for the 2009-10 income year?

Background information

A taxpayer's employment terminates in June 2009 and his final salary payment is made at that time (and included in his 2008-09 assessable income). However, a lump sum representing his annual and long service leave is paid in July (and included in his 2009-10 assessable income).

During the 2009-10 financial year, the taxpayer does not engage in any activities resulting in him being treated as an employee for the purposes of the Superannuation Guarantee (Administration) Act 1992 (SGAA).

Consequently (and following some of the logic suggested by TR 2009/D3) it would seem that the lump sum annual and long service leave payment received in July 2009 would not be considered attributable to employment activities in 2009-10 for the purposes of section 290-160 of the ITAA 1997.

Industry view/suggested treatment

The above sets out the industry suggested view - that is, in this particular fact scenario, the lump sum received in July 2009 would not be considered attributable to activities set out in section 290-160(1) of the ITAA 1997. Consequently, this income alone would not prevent the taxpayer from meeting the '10% test' set out in that section.

However, it would be valuable to have some ATO guidance on the following conclusions that can be drawn from this and other scenarios:

¦ Is the fact that the taxpayer was not employed during 2009-10 (employment ceased in June 2009) decisive? In other words, if the taxpayer had carried out some final work in July 2009, the full amount of the annual and long service leave payment would have been counted for the purposes of section 290160(2).

¦ If the taxpayer worked for another employer later during 2009-10 and received income from that source, this income would be treated as being attributable to the activities set out in section 290-160(1) for the purposes of the test in section 290-160(2). However, this would not change the treatment of the lump sum annual & long service leave payment received in July 2009. That income would continue to be excluded from the taxpayers income attributable to employment.

Technical reference

Section 290-160 of the Income Tax Assessment Act 1997

Impact on clients

Likely to affect few people (most will receive all their entitlements on or before the last day of their employment) but it is a potentially significant issue for those who don't.

Priority of issue where ATO view is required

Low

ATO initial response

No. Where a taxpayer's employment terminates in June 2009, but their annual and long service leave entitlements are not paid until July 2009, those payments are not included in the maximum earnings test for the 2009-10 income year.

Reasons for advice

Section 290-160 of the ITAA 1997 requires a taxpayer who makes a superannuation contribution to meet a maximum earnings test where they are engaged in an employment activity in the income year in which they make the superannuation contribution.

Subsection 290-160(1) of the ITAA 1997 requires the taxpayer to firstly determine if, during the year in which they made the contribution, they engaged in employment activities that resulted in them being treated as an employee for the purposes of the SGAA.

Where the taxpayer has engaged in employment activities in an income year in which they make a contribution, subsection 290-160(2) of the ITAA 1997 requires the sum of their assessable income, reportable fringe benefits total and reportable employer superannuation contributions attributable to those employment activities to be less than 10% of the total of their assessable income, reportable fringe benefits total and reportable employer superannuation contributions amounts in that year.

Where a taxpayer's unused annual leave and unused long service leave entitlements are not paid until July 2009 in relation to their June 2009 termination, those payments, to the extent to which they are assessable, are included in the taxpayer's assessable income in the income year they are received. 1 That is, they are included in the assessable income of the 2009-10 income year.

As the taxpayer terminated employment prior to the 2009-10 income year those amounts will not be included in the maximum earnings test for the 2009-10 income year as they are not attributable to employment activities in the income year they were assessable. This would apply regardless of any other employment activities in the 2009-10 income year.

If the taxpayer's employment continued into the 2009-10 income year the amounts would be included in the maximum earnings test for the 2009-10 income year as they would then be attributable to employment activities in the income year in which they were assessable.

Meeting discussion

The chair asked the members if they were satisfied with the response provided.

Members accepted the ATO's initial response.

The ATO advised that their systems would not automatically detect that the deduction is allowable in this situation. The members were advised that in this situation the system may just automatically disallow the deduction and it might be necessary to lodge an objection to their notice of assessment. The entitlement to superannuation co-contributions would be determined once the objection was processed.

Post meeting advice

ATO systems will not automatically reject the deduction claim in a situation such as this. Further information will be sought to determine whether there is any income at the 'salary or wages' labels that ought to be excluded for the purposes of applying the 10% test.

1 Sections 83-10 and 83-80 of the ITAA 1997 include these payments in assessable income when they are received.

1.6.2 Segregated current pension assets

Where a fund owns a property, is it possible to treat a portion of that property (say 50%) as a segregated current pension asset for the purposes of section 295-385 of the ITAA 1997.

Background information

ITAA 1997 section 295-385 and section 295-390 provide for an exemption on part or all of a superannuation fund's ordinary and statutory income because it is providing superannuation income streams.

Whether a fund obtains its exemption under section 295-385 or section 295-390 depends on whether or not its assets are 'segregated'. Funds with 'segregated current pension assets' claim their exemption under section 295-385.

This section stipulates that a fund's assets will be segregated current pension assets if (among other things) they are 'invested, held in reserve or otherwise dealt with at that time solely to enable the fund to discharge all or part of its liabilities (contingent or not) in respect of superannuation income stream benefits' (extracted from section 295-385(3)(a)).

To the extent that it is relevant for this question, section 295-385 of the ITAA 1997 essentially mirrors section 273A of the Income Tax Assessment Act 1936 (ITAA 1936).

Neither the current or former legislation, the explanatory memorandum to Taxation Laws Amendment (Superannuation) Bill 1989 (the bill introducing the 273A ITAA 1936) or another key ATO publication on the topic (IT 2617) provide examples or other guidance on exactly what will or will not constitute segregation.

As a result, a range of different interpretations have arisen. The property example above perhaps best illustrates the variation.

Some practitioners would argue that it is not possible to segregate half an asset as by definition it cannot be invested separately from the other half of the same asset.

However, others would argue that the requirements of segregation will be met if (say) the fund's financial accounts record the fact that 50% of the rental income 'belongs' to the pension members' accounts.

Industry view/suggested treatment

Given the very wide range of interpretations which currently exist within the industry, SMSF Professionals Association of Australia (SPAA) would be reluctant to recommend an approach. However, we do believe that some guidance on the issue of segregation in general would be extremely valuable to industry, particularly SMSFs.

Technical reference

ITAA 1997 section 295-385

IT 2617

Impact on clients

Currently causing confusion and considerable uncertainty for accountants in particular.

Priority of issue where ATO view is required

Low - This is not a new issue and to that extent it is not urgent. However, it is an issue which is ideally suited for ATO guidance in that there are a range of interpretations within industry (that is, there is a significant lack of consistency).

ATO initial response

The ATO acknowledges that it would be desirable to provide further guidance on the issue of segregation. However, we receive very few requests for advice that provide meaningful factual situations that would help us clarify the operation of the law.

Without expressing a formal view in relation to the scenario provided, we would point out that the definition of segregated current pension assets in subsection 295-385(3) of the ITAA 1997 requires an asset to be held 'solely' to enable a fund to discharge its liabilities in relation superannuation income streams. Therefore, it would not seem arguable that only a part of an asset can be held as a segregated asset.

To the extent that subsection 295-385(6) of the ITAA 1997 appears to suggest that an apportionment is possible, we think the Explanatory Memorandum to Tax Laws Amendment (2007 Measures No.4) 2007 which inserted that subsection makes it clear that the purpose of the provision is to ensure the 'assets which are not included in the income stream account balance will be ineligible for the tax concession available to segregated current pension assets'.

Further guidance can be provided if a formal ruling request is submitted.

Meeting discussion

The chair asked the members if they were satisfied with the response provided.

The SPAA representative asked if any of the accounting bodies have come across this issue and if it was their view that there was a wide disparity of practice? The Institute of Chartered Accountants in Australia (ICAA) representative said the issue is becoming more prevalent than they would have anticipated.

The Law Council member said they often received questions on this sort of issue.

A common question is whether the money in a single bank account would be considered to be segregated if part of the balance represented the assets supporting a member in accumulation phase and the remainder represented assets supporting a pension.

The representative suggested that for an asset such as real property, it would be reasonable to suggest that it is not possible to segregate part of the asset. However, it was suggested that the answer may be different where the asset, like a bank account, represented an underlying asset that is fungible.

The ATO indicated that it would be unlikely to allow part of asset to be segregated, even a bank account.

The ATO stated that it is an emerging issue for the ATO and that the business service line (BSL) needs to do some more work on this issue. The BSL also noted that a number of audits on exempt current pension income issues were being conducted this year. One clear issue emerging from these audits is that many funds have failed to obtain the necessary actuary's certificate even though the proportional method is being used to calculate the exempt current pension income amount. The ATO also said that it is clear that trustees need more guidance on what is required to be done to demonstrate that an asset has been segregated. While that may not be an interpretive issue, it is very important to the application of the law.

The general consensus among members was that the issue is probably more prevalent than generally expected and that there was a need for more advice on the matter, including on the general question of what is segregation.

Action item

NTLGSPR 090310/1

Description

Segregated current pension assets.

External members are asked to provide detailed information on the common issues they have on segregated assets.

Responsibility

The SPR BSL to look further into issues raised by externals.

1.6.3 Concessional contribution cap: individual does not reach age 50

An individual is due to reach age 50 in a given financial year (and that financial year is 2011-12 or earlier). However, he or she dies before reaching age 50 - what concessional contributions cap applies in that financial year?

Background information

section 292-20 of the Income Tax (Transitional Provisions) Act 1997 (ITTP 1997) applies if the taxpayer is 50 years or over on the last day of the financial year.

In the financial years 2007-08 to 2011-12 (inclusive), individuals who satisfy this condition have a concessional contributions cap for that financial year of:

a. $100,000 in both 2007-08 and 2008-09, and

b. $50,000 in each of 2009-10, 2010-11 and 2011-12.

Otherwise, the standard concessional contributions caps apply under section 292-20 of the ITAA 1997.

Where the taxpayer dies during the financial year (particularly before his or her 50th birthday), some confusion arises from the use of the words ' you are 50 years of age or over on the last day of that financial year' (emphasis added) rather than (say) 'you would be '.

Industry view/suggested treatment

In order to fair and equitable treatment for all individuals, section 292-20 of the ITTP 1997 should apply in circumstances where an individual, who is due to reach age 50 in the financial year, dies before reaching age 50 that financial year.

Technical reference

Section 292-20 of the Income Tax (Transitional Provisions) Act 1997

Section 292-20 of the Income Tax Assessment Act 1997

Impact on clients

Currently, some lack of certainty.

Priority of issue where ATO view is required

Low - Whilst there is some uncertainty as to what the concessional contributions cap is in a financial year under these circumstances, it will affect few people.

ATO initial response

Where an individual dies in the financial year they turn 50 years but before reaching 50 the concessional contributions cap for that final year is the cap provided under subsection 292-20(2) of the ITAA 1997 not the transitional concessional contributions cap provided under section 292-20 of the ITTP 1997.

Reason for advice

1. Subsection 292-20(2) of the ITAA 1997 sets each taxpayer's concessional cap for a financial year. However, section 292-20 of the ITTP 1997 will apply a transitional concessional contributions cap instead of the cap set under subsection 292-20(2) of the ITAA 1997 where the conditions in section 292-20 of the ITTP 1997 are satisfied.

2. Subsection 292-20(2) of the ITTP 1997 provides a transitional concessional contributions cap to each of the financial years from 2007-08 to 2011-12 where the taxpayer has excess concessional contributions in the financial year and where they are '50 years or over on the last day of that financial year.'

3. Subsection 292-20(2) of the ITTP 1997 cannot apply to an individual who died before their 50th birthday irrespective of whether the subsection would have applied if they had not died during the year. For example, a taxpayer who would have been 50 years during 2010-11 financial year but died before turning 50 would not be '50 years or over on the last day of that financial year'.

4. However, where an excess contributions tax assessment has issued under these circumstances consideration may be given to making an application under section 292-465 of the ITAA 1997 for the Commissioner's discretion to disregard the excess concessional contributions.

Meeting discussion

The chair asked the members if they were satisfied with the response provided. Members accepted ATO's initial response.

One of the members asked whether the discretion would be exercised in this sort of situation.

The ATO stated that as a general proposition it would be sensible to put in a request for the exercise of the discretion, where these circumstances arise, but all of the individual circumstances would need to be considered to determine if the discretion would be exercised.

A member also raised the question about what would happen if a member had turned 50 during the financial year, but had died during the year. Technically they would not actually be 50 on the last day of the financial year as they would be deceased.

The ATO advised that in this situation the member would be treated as though they were 50 at the end of the financial year as they had reached that age before they had died.

A member also asked whether they should be telling their clients not to make contributions until they have actually reached the age of 50. The ATO stated it would be up to the adviser to determine if that advice was appropriate. However, if the member wanted certainty they would need to wait until they had actually reached 50 years of age.

1.6.4 Deductions for increased amount of superannuation lump sum death benefits

A member of a SMSF has died. The trustee of the fund decides to pay various benefits to the deceased's beneficiary(ies) - that is, a combination of lump sum superannuation death benefits and death benefit pensions will be paid from the deceased's member's account balance.

Is the Trustee of the SMSF eligible to claim a deduction under section 295-485 of ITAA 1997 in respect to that part of the deceased's account balance that is paid out as a lump sum superannuation death benefits paid? Assume that:

¦ the lump sum superannuation death benefit is paid to the trustee of the deceased's estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment, and

¦ the trustee increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount ) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in assessable income under subdivision 295-C.

Or must the whole of the deceased's account balance be paid out as a lump sum superannuation death benefit in order for the trustee to be eligible to claim a deduction/increase the lump sum under section 295-485 of ITAA 1997?

Question 2

Section 295-485(3) of ITAA 1997 outlines the 'amount the Fund can deduct' in relation to lump sum superannuation death benefits paid providing certain criteria are met.

Is the amount outlined in section 295-485(3) the maximum amount that can be claimed?

In other words can a lower amount be claimed as long as the increase in the lump sum amount corresponds to the lower amount claimed?

Or is the amount outlined in section 295-485(3) the fixed amount that must be claimed in relation to that lump sum superannuation death benefit?

Background information

An entity that is a complying superannuation fund, or a complying approved deposit fund, and has been since 1 July 1988 (or since it came into existence if that was later) can deduct an amount under section 295-485(1) of ITAA 1997 if:

c. it pays a superannuation lump sum because of the death of a person to the trustee of the deceased's estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment, and

d. it increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in assessable income under subdivision 295-C of ITAA 1997.

The fund can deduct the amount in the income year in which the lump sum is paid (section 295-485(2) of ITAA 1997).

The amount the fund can deduct (section 295-485(3) of ITAA 1997) is:

Tax saving amount

Low tax component rate

where the low tax component rate is the rate of tax imposed on the *low tax component of the fund's taxable income for the income year.

Industry view/suggested treatment

In our view, the amount outlined in section 295-485(3) is the maximum amount that can be claimed and a lower amount can be claimed as long as the increase in the lump sum amount corresponds to the lower amount claimed.

Technical reference

Section 295-485 of ITAA 1997.

Impact on clients

There appears to be some varied interpretations of the application of section 295-485 of ITAA 1997 amongst practitioners within the industry. As such, it is difficult for clients to obtain accurate advice.

Priority of issue where ATO view is required

High - Given that the relevant sections of the ITAA have been modified in recent years in relation to claiming a deduction for an increased amount of superannuation lump sum death benefits, and there is some inconsistency/confusion amongst practitioners within the industry, some early guidance from the ATO on its interpretation would assist both advisers and clients.

ATO initial response

We are currently considering this question in the context of a private binding ruling request. We expect to publish an ATO ID following the resolution of that ruling.

Meeting discussion

A member asked whether the PBR raised any issues that were not in the NTLG question, such as allocations from superannuation funds reserves directly to a deceased member's estate. The ATO stated that the PBR was directly on point with this question, and only covered the issue outlined in the response.

No further comments received.

1.6.5 Deductions for increased amount of superannuation lump sum death benefit where the benefit arises from the commutation of a pension

Background information

An entity that is a complying superannuation fund and has been since 1 July 1988 (or since it came into existence if that was later) can deduct an amount under section 295-485 of ITAA 1997 if:

e. it pays a superannuation lump sum because of the death of a person to the trustee of the deceased's estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment, and

f. it increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in assessable income under subdivision 295-C of ITAA 1997

Where the deceased's balance was (say) still accumulating within the fund and is paid out as a lump sum on death, this deduction clearly applies (providing the requisite conditions in relation to augmenting the benefit etc are met).

However, death benefits are often initially paid in the form of one or more superannuation income streams to the surviving spouse - either because an income stream was already in place and this has reverted to the spouse or because a new income stream commences for the spouse on death.

Would a deduction under ITAA 1997 section 295-485 ever be possible if a lump sum payment was made from that income stream (that is, a commutation)? We believe there are several scenarios worthy of consideration.

Scenario 1

Under the terms and conditions agreed when the superannuation income stream first commenced (that is, before death), it automatically reverted to the spouse on the original pensioner's death. The spouse chooses to commute (either partially or in full) within the later of:

¦ six months after the death of the deceased person, or

¦ three months after the grant of probate of that deceased person's will or letters of administration of that deceased person's estate; and

¦ assuming no delays because of legal action about entitlement to the benefit or in the process of identifying and making initial contact with potential recipients of the benefit and a lump sum is paid. In accordance with section 307-5(3) of ITAA 1997, such a payment would be a superannuation death rather than a superannuation member benefit. However, is this lump sum superannuation death benefit a 'superannuation lump sum because of the death of a person' in accordance with section 295-485(1)(a) of ITAA 1997?

Scenario 2

As per scenario 1 except that the lump sum commutation is paid outside the period described by section 307-5(3) of ITAA 1997. In other words, the payment is a superannuation member benefit rather than a superannuation death benefit.

Scenario 3

The terms and conditions of the original superannuation income stream were such that no reversionary beneficiary was specified. On the original pensioner's death, therefore, the superannuation income stream stopped. However, the trustee resolved to provide the death benefit to the surviving spouse in the form of a pension - effectively a new superannuation income stream.

The spouse subsequently resolved to commute (partially or fully) this superannuation income stream and paid a lump sum. The commutation occurred within the period specified in ITAA 1997 section 307-5(3) and hence the lump sum was a superannuation death benefit.

Scenario 4

As per scenario 3 except that the payment was made outside the period specified in section 307-5(3) of the ITAA 1997.

Would the position for scenarios 3 and 4 be different if the payment of the death benefit pension had been driven by the surviving spouse rather than the trustee (that is, the spouse had requested payment of the benefit in this form and the trustee had agreed)?

Similarly, would the position for scenarios 3 and 4 be any different if the deceased's balance had been accumulating in the fund at the time of death rather than already in pension phase?

Industry view/suggested treatment

The key issue here is whether or not the lump sum is being paid because of the original pensioner's death or whether it is being paid because the spouse decided to exercise his or her right to draw a lump sum from a pension.

In the writer's view, whether or not the lump sum payment is classified as a superannuation death benefit or a superannuation member benefit has no obvious relevance. While the timeframe of the payment may suggest a closer or weaker nexus between the death and the lump sum, the particular timeframe in section 3075(3) of the ITAA 1997 is not decisive.

In our view, the ability to pay a benefit (regardless of the form of the benefit) to a beneficiary of the deceased is due solely to the death of the deceased. In other words, if the member had not died no benefit (of any kind) would be payable to the deceased's beneficiaries.

Consequently, in our view there is a necessary causation between the death of the member and the lump sum superannuation death benefit paid upon commutation of the initial pension regardless of when the actual payment is made.

Technical reference

Section 307-5 of ITAA 1997.

Section 295-485 of ITAA 1997

Impact on clients

Clients that receive a death benefit in the form of a pension which is subsequently commuted within the required three month/six month window, may not take advantage of the ability to claw back taxes previously deducted from the deceased's member's balance - consequently, the lump sum superannuation death benefit paid may be less than the optimal amount.

Priority of issue where ATO view is required

Medium

ATO initial response

The ATO acknowledges that it would be desirable to provide further guidance on the operation of section 295-485 of the ITAA 1997. However, we receive very few requests for advice that provide meaningful factual situation that would help us clarify the operation of the law.

Without expressing a formal view in relation to the scenario provided, we would point out section 295-485 of the ITAA 1997 does not require the relevant lump sum payment to be characterised as a superannuation death benefit. Nor did its predecessor, section 279D of the ITAA 1936.

Further guidance can be provided if a formal ruling request is submitted.

We are also considering issues concerning payments made in full commutation of a superannuation income stream in the context of Ruling ID 3189 which will deal with when a pension commences and ends. In this regard, we are considering the need to characterise the commutation payment as either a superannuation member benefit or superannuation death benefit.

Meeting discussion

There was some discussion as to the role of the NTLG. The ATO explained that members could raise issues but that the NTLG was not a replacement for the advice regime. ATO views on precedential issues would not be set at NTLG meetings.

The ATO asked members whether there was confusion in the Industry around whether benefits would be classified as life or death benefits in different circumstances. A member said that it was not confusion over life and death benefits as much as how the anti-detriment rules would work in practice.

Another member agreed and said there were lots of questions around the regime. An example of this was the issue with amounts being transferred from reserves and whether this would be counted towards a member's contributions caps. A member stated that clarification was necessary to ensure consistency occurred across the Industry.

The ATO clarified that if an amount is paid from a reserve it will generally be counted towards the members concessional contribution cap. A member said there was an on ongoing issue about whether anti-detriment payments should be treated as being paid from a reserve, and how else they might be able to be treated.

The ATO asked whether members would like guidance on tax/SISR consequences of this, or practical guidance of how to fund the payment and then pay it out.

The Australian Prudential Regulation Authority (APRA) representative commented that they were concerned that some of the practical issues were sometimes used as an excuse for funds to not pay out anti-detriment payments. They have been encouraging funds to ask the ATO directly for advice but this appears to not be happening.

The ATO asked that members provide details as to the issues of concern so that the scope of the issue and an appropriate course of action can be determined.

Reference	NTLGSPR 080909/03
Action item	Anti-detriment Members to provide further examples as to the issues of concern.
Responsibility	Members
Status (or due date)	Members to provide examples by 30 April 2010

ATO final response

However, members should note that the ATO has previously advised that the anti-detriment payment deduction cannot be claimed where the death benefit is not paid as a single lump sum. For example, the ATO provided advice to industry bodies that the former section 279D of the ITAA 1936 deduction could not be claimed where a benefit is paid on the death of a primary beneficiary to a dependant in the form of a pension.

Further guidance can be provided if a formal ruling request is submitted.

The ATO is also considering issues concerning payments made in full commutation of a superannuation income stream in the context of Ruling ID 3189 which will deal with when a pension commences and ends. In this regard, we are considering the need to characterise the commutation payment as either a superannuation member benefit or superannuation death benefit.

1.6.6 Binding death benefit nomination verses reversionary pensions

Does a reversionary nomination in an account based pension take precedence over a binding death benefit nomination (BDBN) or are the trustees bound by the BDBN following the death of the original pension recipient?

Background information

A member of a SMSF was in receipt of an account based pension in which his wife was nominated as the reversionary. He also completed a valid BDBN in favour of his daughters. Following his death, the trustees are unsure which should take precedence - the reversionary nomination or the BDBN

Industry view/suggested treatment

Wide consultation on this issue has resulted in different opinions, including from several legal sources. Opinions include:

5. The pension remains on foot and the pension to the wife continues until such time as the wife dies, whereupon the balance in the original deceased's account is then available for the trustees to pay out as a death benefit (as per BDBN)

6. The pension remains on foot and now belongs to the wife. In the event of her death, the benefits will be paid to her beneficiaries or to her estate.

The reversionary element cannot fetter the trustee's powers and they are bound to stop the pension to the wife and distribute the benefits as per the BDBN. Any contractual requirement is not able to be overturned by the requirements of the trustee to follow the law or the deed.

Impact on clients

Provide certainty for trustees on their obligations.

Priority of issue where ATO view is required

Low

ATO initial response

There are no SIS Act or SISR provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member's death.

While section 59 of the SISA and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3 the Commissioner is of the view that those provisions do not have any application in regards to SMSFs.

In the absence of relevant provisions in the SISA or SISR, the issue of which nomination takes precedence is one which would need to be determined by reference to the governing rules of the fund under which the nominations are made, general trust law and any other legislation which may be relevant.

However, we would suggest that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner. It is only where a trustee has a discretion as to the beneficiary who is entitled to receive the deceased member's benefits and the form in which the benefits are payable that a death benefit nomination is relevant. It must be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust.

Meeting discussion

Overall members were happy with the ATO's initial response. However, members felt a more definitive statement would be of assistance.

One member said they agreed with the response and added that as a member of an SMSF can make a BDBN, but it is not covered by SISR, it seems logical that the reversionary pension would take precedence.

Another member said they considered that from a legal perspective the response is correct. If a pension is truly reversionary, the reversionary beneficiary is set at the outset. A BDBN could only apply if there was an amount left in the account not covered by the reversionary pension.

They said that it would be nice to get a definitive statement from the ATO even though the legal issue is not uncertain in itself, particularly as the approach is untested in the courts.

The ATO stated that the answer was phrased as it was because the question did not provide clear specific facts. The ATO also noted that the issue has also been considered as part of the work being done on the draft superannuation income stream ruling that is due out shortly. The ATO undertook to consider when and how a more definitive statement on this issue could be made in the context of finalising the draft ruling.

ATO final response

While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3 the Commissioner is of the view that those provisions do not have any application to SMSFs. It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust.

If the governing rules of a SMSF authorise a death benefit nomination, the trustee must follow the fund's rules and the general trust law and any other legislation which may be relevant.

Notwithstanding those observations, the ATO's view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner. It is only where a trustee may exercise its discretion as which beneficiary is paid the deceased member's benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.

1.6.7 Determination of certain timeframes when a member dies and probate is not obtained

Background information

ITAA 1997 section 307-5 defines when a particular benefit is a 'superannuation member benefit' and when it is instead a 'superannuation death benefit'. The two types obviously have different tax treatment.

The category into which a commutation from a superannuation income stream (paid to the recipient as the result of the death of someone else - either a reversionary pension or a new pension which commenced on death) is determined under ITAA 1997 section 307-5(3). This section includes the following timeframe:

'…the latest of the following:

i. six months after the death of a deceased person;

ii. three months after the grant of probate of that deceased person's will or letters of administration of that deceased person's estate'.

(There are two additional subsections but these are not relevant for the purposes of this question.)

A commutation made outside this timeframe is a superannuation member benefit whilst one made within the timeframe is a superannuation death benefit.

It is common for no probate to be obtained and this affects subsection (ii) of the above timeframe.

When no probate is obtained, will a benefit always be a superannuation death benefit OR is it reasonable to ignore 307-5(3)(ii) and simply determine that the commutation will be a superannuation member benefit if it occurs more than 6 months after the deceased's death and probate is not to be obtained?

Industry view/suggested treatment

Where probate is not obtained, it would appear reasonable to ignore the second arm of the timeframe requirement. In other words, the timeframe simply becomes 'six months after the death of the deceased person'.

Technical reference

ITAA 1997 307-5(3)

However, note that the same timeframe is used in other contexts and the same principles would apply.

Impact on clients

If the industry interpretation above is acceptable, this would remove an unnecessary cost for those affected (that is, those who want to fall outside the timeframe and hence arguably need to obtain probate to put this beyond doubt). It would also ensure that the surviving spouse of a deceased person could not prolong the period during which a commutation is treated as a superannuation death benefit indefinitely simply by not obtaining probate.

It will be relevant in several instances:

¦ the tax treatment where the deceased and spouse are both under 60 (hence a commutation treated as a superannuation death benefit would be tax free but a commutation treated as a superannuation member benefit would be taxable), and

¦ when the survivor wishes to rollover from one fund to another (for example, to wind up a self managed superannuation fund). Under ITAA 1997 section 306-10(a), only superannuation member benefits (not superannuation death benefits) can be rolled over.

Priority of issue where ATO view is required

Low

ATO initial response

Generally, when a person dies with a will which appoints an executor, the primary duty of the executor is to establish the validity of the will. To do this the executor will obtain a grant of probate from the court.

When a person dies without a will an administrator is appointed by the court, prior to the distribution of the estate of the deceased. When this occurs, the administrator is granted letters of administration. Letters of administration are also granted in a situation where the executor appointed under a will cannot perform the duties and an administrator is appointed to distribute the estate in accordance with the will.

Therefore, the law generally requires a grant of probate or letters of administration to administer a deceased estate. However, there are exceptions to these rules depending on the jurisdiction in which the deceased lived.

As a result of these exceptions and for other practical reasons, many small estates can be administered without fulfilling these formal requirements. Where that is done, subparagraph 307-5(3)(c)(ii) clearly cannot be applied. Accordingly, it would appear reasonable to simply apply the time limit specified in subparagraph 307-5(3)(c)(i) (assuming subparagraphs (iii) and (iv) are not relevant).

Meeting discussion

The chair asked members if they were happy with the response provided. Members accepted ATO's initial response.

No further comments received.

1.6.8 Source of anti-detriment payments

At the June 2009 NTLG STS meeting, the issue was raised as to whether an anti-detriment payment should be treated as a concessional contribution and hence subject to the contribution caps.

The ATO view expressed at the meeting was that where a trustee allocates an amount from a reserve in making the anti-detriment payment, which is referred to as augmenting the benefit payment, the amount so allocated is a concessional contribution. The ATO also expressed the view that, where the augmentation amount is not allocated from a reserve, it will not be a concessional contribution.

We believe this view is not correct and that the mechanism for financing an anti-detriment payment should never give rise to the anti-detriment payment being classified as a concessional contribution. The true source of the anti-detriment payment is always the future income tax benefit created by the anti-detriment payment. The use of 'reserve' is simply one of the mechanisms used to facilities the anti-detriment payment until the ATO refund is required.

Background information

Prior to 30 June 1998 the income of the superannuation fund was not subject to tax. Benefits payable from a superannuation fund were (in respect of service after 30 June 1983) taxed at 30% (ignoring Medicare levy). When tax was introduced on superannuation fund income, the government's position was that it was effectively brining forward, rather than increasing tax. On the introduction of the 15% tax on fund income, the 30% tax rate on benefits was reduced to 15%.

However, prior to 30 June 1988, lump sum benefits payable to a dependant on the death of the member were not subject to tax. Therefore, 'bringing forward' a benefit tax of 15% would actually result in an increase in tax incurred on such lump sums.

To give effect to the government's position, Section 279D was introduced to the ITAA 1936 which provided a deduction to offset the negative impact of the introduction of tax on the payment of a benefit on a member's death to a dependant. Due to the introduction of the Better Super tax changes, the anti-detriment provisions were rewritten in section 295-485 of the ITAA 1997. The intention of the original legislation remains unchanged.

Industry view/suggested treatment

Our view is that the source of an anti-detriment payment is the tax deduction created by the anti-detriment payment, and a payment by any fund generated by a tax deduction is not a concessional contribution. The source of the anti-detriment payment and the funding mechanism for the anti-detriment payment should not be confused. Nor should the funding mechanism be considered to be a concessional contribution.

There needs to be a funding mechanism because the tax deduction is generated by the anti-detriment payment and follows the anti-detriment payment. In effect, the anti-detriment payment is an advance payment of the tax benefit created by the anti-detriment payment.

That a 'reserve' may be used to finance the physical payment of the anti-detriment amount should not be considered to be an allocation from the reserve, because the reserve will be replenished by the tax deduction once it materialises. The financing of the anti-detriment payment from a reserve is therefore not an 'allocation' from the reserve. It is perhaps more akin to an 'advance' from the reserve, to enable the trustee to make the anti-detriment payment, which is repaid by the tax deduction.

To form a view that the anti-detriment payment is a concessional contribution defeats the original intention of the legislation which, of course, was not changed with the introduction of Better Super. To cite an one extreme outcome, if the anti-detriment payment was considered to be a concessional contribution, then there is the potential that the anti-detriment payment would breach the concessional contributions cap, resulting in excess concessional contribution tax on the payment (and, indeed, even the potential for there to be excess non-concessional contribution tax depending on the size on the anti-detriment payment) which is inconsistent with the intention of the legislation.

ATO initial response

Background

A submission has been received via a member of the NTLG STS that the views expressed by the ATO in the June 2009 NTLG STS on anti-detriment payments and excess contributions tax, are not correct.

The views expressed by the ATO were:

7. Where the trustee augments a superannuation lump sum to take advantage of the deduction available under section 295-485 of the ITAA 1997 the amount of the augmentation is a concessional contribution under subsection 292-25(3) of the ITAA 1997 where it is allocated to the deceased member's account from a reserve unless the exclusion in paragraph 292-25.01(4)(a) of the Income Tax Assessment Regulations 1997 (ITAR 1997) applies.

8. Where the augmentation amount is not allocated to the deceased member's account from a reserve it will not be a concessional contribution unless it is funded from a contribution that meets the requirements of subsection 292-25(2) of the ITAA 1997. The contribution will count for the purposes of excess contributions tax. In respect of a self-managed superannuation fund, the ATO expects the augmentation to usually be made from a reserve.

Member's view

The NTLG member argues that the mechanism for financing an anti-detriment payment should not give rise to the payment being classified as a concessional contribution.

They state that the true source of an anti-detriment payment is the tax benefit created by the deduction under section 295-485 of the ITAA 1997 and that the payment to the deceased member's account prior to receipt of the tax benefit is an advance of the benefit. While the advance may be paid from a reserve, the reserve is refunded once the tax benefit is received.

Further they argue that treating the payment as a concessional contribution is not consistent with the original intention of the legislation regarding anti-detriment payments. That is, the anti-detriment payment is intended to ensure a lump sum payment to a dependant after the death of the member is not reduced as a result of tax payable on contributions.

Response

The previous advice given to the NTLG STS remains unchanged. Unless one of the specific exceptions in subregulation 292-25.01(4) of the ITAR 1997 applies, an amount allocated from a reserve will be a concessional contribution regardless of the reasons for the payment.

Explanation

As indicated in the original response from the ATO the amount of a person's concessional contributions for a financial year is determined under section 292-25 of the ITAA 1997. Subsection 292-25(3) of the ITAA 1997 includes in concessional contributions amounts allocated by the superannuation provider in accordance with the conditions specified in regulation 292-25.01 of the ITAR 1997.

Apart from a number of exceptions, subregulation 292-25.01(4) of the ITAR 1997 includes amounts allocated from reserves as concessional contributions. Unless one of the specific exceptions applies, an amount allocated from a reserve will be a concessional contribution regardless of the reasons for the allocation. The provisions do not permit consideration to be given to why the allocation was made. The provisions also do not permit consideration to be given to whether the reserve will be subsequently re-credited when an amount is received by the superannuation provider at a later time. Further, the regulations do not allow the Commissioner to exercise a discretion to disregard the allocation from the reserve. Therefore, if the trustee allocates an amount from a reserve to the deceased member's account to make an anti-detriment payment the amount is a concessional contribution for the deceased member unless the exclusion in paragraph 292-25.01(4)(a) of the ITAR 1997 applies.

The exclusion in paragraph 292-25.01(4)(a) of the ITAR 1997 applies where the amount is allocated in a fair and reasonable manner to every member or, if the reserve relates to a class of members, to every member of that class. Further, the amount allocated must be less than 5% of the value of the member's interest in the fund at the time of allocation. It is considered unlikely that the exclusion in paragraph 292-25.01(4)(a) can apply as the amount of the augmentation is likely to exceed 5% of the value of the deceased member's interest at the time of allocation from the reserve.

It is considered that the policy intent is for all amounts allocated from reserves to be concessional contributions unless the exclusions in subregulation 292-25.01(4) of the ITAR 1997 applies. This is clear from the following statement in the Explanatory Statement to Income Tax Assessment Amendment Regulations 2007 (No.6).

Items 1 to 3 amend subregulations 292-25.01(2), (4) and (5) so that the concessional contributions cap applies to all contributions required to be allocated by a trustee under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994 , and all amounts allocated from reserves by a trustee (but which are not required to be allocated under Division 7.2 of the Superannuation Industry (Supervision) Regulations 1994 ) except those amounts that satisfy the exemption conditions outlined at paragraph 292-25.01(4)(a) or (b).

Meeting discussion

The chair asked members if they were happy with the response. Members said the view outlined was probably correct as the law was clear on what would happen when payment from a reserve occurred.

A member said it would be up to Industry to go to Treasury to determine if there was any other way an anti-detriment payment could be made (that is, other than from a reserve).

Another member asked whether the same issue would arise if the payment was not made via the account of the deceased member. For example, some advisers suggest that the fund's deed could authorise the payment be made directly from a reserve to the estate of the deceased.

The ATO said it could not see how this could occur as there did not appear to be any authority that would allow the trustee to pay an amount out that did not come from a member's interest in the fund (other than where the fund was actually wound up).

The same contributions caps issue can arise when a superannuation fund holds an insurance policy. If the trustee is aware that insurance proceeds are to be paid they may advance the money to a member from a reserve then, replenish the reserve with the insurance proceeds. Again, the legislation clearly applies to the advanced payment from the reserve and an amount would be included in the member's contributions caps.

A member indicated that additional information might be provided in relation to these concerns for ATO consideration.

The ATO will deal with any further agenda items on this topic as they arise.

1.6.9 Unit trusts and non arm's length income

Section 295-550 of the ITAA 1997 provides, amongst other things, that income derived by a beneficiary who does not have a fixed entitlement is non-arm's length.

Background information

There are various types of trusts that superannuation funds invest in such as unit trusts and some may have hybrid entitlements.

A unit trust may be a fixed trust for income tax purposes if it confers on unit holders rights to income and capital that are fixed: section 272-65 of the ITAA 1936 and section 295-550 of the ITAA 1997. Such a unit trust would ensure the issue and redemption of units was done reflective of net asset value determined in accordance with general accounting principles. It would also ensure that the rights of unit holders could not be adversely affected without the relevant unit holder's consent.

The ATO should take a practical approach to determining what is a fixed trust. Provided the unit trust does not have discretionary units, the trust should be considered a fixed trust.

Technical reference

Section 272-65 of the ITAA 1936 and section 295-550 ITAA 1997

Impact on clients

If a fund invests in a fixed unit trust, then the income will obtain concessional tax treatment. If the fund invests in a non-fixed trust, the income will be taxed at 45%.

Priority of issue where ATO view is required

High

ATO initial response

TR 2006/7 explains what amounts were considered to be 'special income' under section 273 of the ITAA 1936. Section 273 was subsequently rewritten as section 295-550 of ITAA 1997 which now determines the non-arm's length component of a superannuation fund's income. Guidance provided in TR 2006/7 continues to embody the ATO approach to the taxation of trust distributions derived by superannuation funds.

It is to be recognised that the meaning of fixed entitlement in section 295-550 is not defined by section 272- 65 of Schedule 2F as suggested but has the ordinary meaning of the words having regard to the context in which they appear. Section 295-550 is an anti-avoidance provision which is designed to prevent income from being unduly diverted into superannuation entities as a means of sheltering that income from the normal rates of tax applying to other entities, particularly the marginal rates applying to individual taxpayers. The ATO will continue to apply section 295-550 consistent with its underlying policy intent.

Relevantly TR 2006/7 states that

If a complying superannuation fund, complying ADF or PST derives income from a trust by way of the trustee or any other person exercising a discretion, the income distributed will be special income under subsection 273(6). A trust distribution to a complying superannuation fund, complying ADF or PST will fall within subsection 273(7) rather than subsection 273(6) if the entity's entitlement to the distribution does not depend upon the exercise of the trustee's or any other person's discretion.

A trust distribution arising from a fixed entitlement will only be special income if three conditions are met:

¦ the entity must have acquired the fixed entitlement under an arrangement or the income must have been derived under an arrangement;

¦ some or all of the parties to the arrangement must not have been dealing with each other at arm's length; and

¦ the amount of the distribution must be greater than the amount of income that might have been expected if the parties had been dealing with each other at arm's length.

Meeting discussion

The ATO reiterated that TR 2006/7 outlines that even though a trust may not be a fixed trust for other income tax purposes, it may be a fixed trust for the purposes of the non-arm's length income rules.

It was also confirmed that TR 2006/7 still provides the ATO view on what constitutes arm's length income even though it refers to the provisions in the ITAA 1936 which were relevant before 1 July 2007.

No further comments received.

1.6.10 Trustee of superannuation fund

SIS Act section 19(3) requires a regulated superannuation fund to have either a corporate trustee or, if individual trustees are appointed, the governing rules must provide that the sole or primary purpose of the fund is the provision of old age pensions.

Assuming a regulated superannuation fund has individual trustees, what is required to satisfy the primary purpose of providing old age pensions?

Industry view/suggested treatment

The statistical summary of SMSFs undertaken as part of the Cooper Review states that around 71% of SMSFs have individual trustees and in recent years nearly 90% of SMSFs have been established without a corporate trustee.

There appears to be no clear guidance from the ATO on what paperwork is required by a superannuation fund that has individual trustees that wishes to pay out a lump sum.

It is understood that the ATO's view is that if a member requests a pension entitlement and then requests that entitlement to be surrendered into a lump sum, that that would satisfy the primary purpose test of the provision of an old age pension. These two steps would normally be documented by appropriate trustee resolutions.

However, if a strict view is taken, then the trust deed governing the fund must provide for a pension to be payable at retirement age. Typically it is expected that an account-based pension must be commenced and then that pension must subsequently be commuted after paying the requisite minimum pension for the period that the pension was running. This approach would involve considerable paperwork and cost.

The concern is that many funds possibly do not have any documentation to support them paying a lump sum in lieu of a pension from a superannuation fund when they have individual trustees.

Technical reference

SISA section 19(3)

Impact on clients

Funds could be in breach of the SIS Act and the payment may be taxed as normal income unless a valid condition of release is satisfied and the appropriate paperwork is completed. The ATO should have a clear and concise published view on this matter.

Priority of issue where ATO view is required

Low

ATO initial response

Essentially the same question has been raised at previous meetings of the NTLG STS. The most relevant discussion is in the NTLG Superannuation Sub-Committee minutes for 8 February 2006 at agenda item 4.9.

The ATO has not revised its position on this issue.

Meeting discussion

The chair asked if members were satisfied with the response having regard to the NTLG minutes of 8 February 2006.

Members accepted ATO's initial response.

No further comments received.

1.6.11 Allocations from contribution reserves to capital of pensions

Can the capital supporting a pension be added to by an allocation from a contributions reserve?

Background information

It is currently impractical to add to the capital supporting a pension. Confirmation that the capital supporting a pension can be added to by an allocation from a contributions reserve would solve this problem.

The effect of regulation 1.06(1)(a)(ii) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) is that the capital supporting a pension may not be added to by way of contribution or rollover after the pension has commenced. As a result, in order for contributions to be added to an existing pension, the following steps must be taken:

¦ Step 1: the contribution is made to an accumulation account. The member therefore then has two accounts: an accumulation account and the pension account.

¦ Step 2: a pro-rated minimum of the existing pension must be paid.

¦ Step 3: the existing pension is commuted. The paperwork to document this step typically incurs considerable costs.

¦ Step 4: the lump sum that arises upon commutation must be internally rolled over within the same fund back to the member's accumulation account. The member therefore now has only one account: the accumulation account.

¦ Step 4: a new pension is created. The member therefore now has only one account: the new pension account. The paperwork to document this step also typically incurs considerable costs.

¦ Step 5: the value of the new pension account is calculated. This essentially requires the preparation of interim accounts, which can also typically incur considerable costs of accounting attendances, valuations, etc.

¦ Step 6: a pro-rated minimum based on the new pension account value must be calculated and paid by the end of the year.

The above outlines a cumbersome and time consuming process. It can easily incur more than several thousand dollars in costs for no real benefit for members.

For a member in transition to retirement income stream ('TRIS') whose employer salary sacrifices on a monthly basis, these steps might need to be repeated a number of times each year. It could be even more if the employer pays 'salary' more regularly (for example, fortnightly).

The other alternative is for the trustee to commence a new pension with each contribution. However, for a member with a TRIS whose employer salary sacrifices on a monthly basis, this can result in 12 different pensions after just one year.

Either way, this discourages people from engaging in TRIS strategies. This is contrary to the policy intention of the law, as the explanatory statement that originally introduced the transition to retirement legislation in 2005 states (Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulations 2005 (No. 2) (Cth), 3):

The purpose of allowing people to access their superannuation from their preservation age without having to retire or leave their job is to give them more flexibility to develop strategies in their transition to retirement. Providing greater flexibility in the rules for accessing superannuation benefits may encourage people to retain a connection with the workforce for a longer period.

Industry view/suggested treatment

The legislative framework makes it clear that an allocation from a reserve is not a contribution or rollover and may be added to the capital supporting a pension after the pension has commenced. See for example regulation 292-25.01(4)(b)(ii)(A) of the Income Tax Assessment Regulations 1997 (Cth).

Further, trustees are expressly empowered to maintain reserves pursuant to section 115 of the Superannuation Industry (Supervision) Act 1993 (Cth). Such a reserve may include a contributions reserves, provided that amounts contributed to the reserve are allocated shortly after being received pursuant to reg 7.08(2) of the SISR.

A contributions reserve is very useful in the SMSF environment. Contributions might be made to the fund by a third party (e.g. an employer) and the trustees might only meet once every few months to review contributions to determine to whom they should be allocated to.

If the ATO confirms that the allocations can be made from a contributions reserve, contributions could be added to an existing pension in only two steps:

¦ Step 1: a contribution is made to the fund's contribution reserve.

¦ Step 2: the trustee allocates the amounts from the contribution reserve to the capital supporting a pension.

The costs and administration to implement these two steps would be significantly more streamlined and should be a small portion of the current costs.

Technical reference

Explanatory Statement, Superannuation Industry (Supervision) Amendment Regulations 2005 (No.2) (Cth), 3

Income Tax Assessment Regulations 1997 (Cth) reg 292-25.01(4)(b)(ii)(A)

Superannuation Industry (Supervision) Act 1993 (Cth) section 115

Superannuation Industry (Supervision) Regulations 1994 (Cth) reg 1.06(1)(a)(ii)

Superannuation Industry (Supervision) Regulations 1994 (Cth) reg 7.08(2)

Impact on clients

Confirm of the ability to allocate from a contributions reserve to a pension account would allow to minimise the administration and costs associated in administrating superannuation funds paying pensions to members in respect of whom contributions are still being made. It would also help to better achieve the policy intention of the transition to retirement legislation.

Priority of issue where ATO view is required

Medium

ATO initial response

The ATO sees this question as essentially a request for legislative change given that subparagraph 1.06(1)(a)(ii) ensures the rules of a fund do not permit the capital supporting an accounted based pension to be added to by way of contribution or roll-over after the pension has commenced.

Contributions made for a particular individual will generally be made in relation to an accumulation interest the individual has in the fund. Except in the limited case of contributions to fund genuine defined benefits (as opposed to those within the meaning of defined benefit pension given by Modification Declaration No 23), contributions made by an employer for an employee will relate to an accumulation interest the member has in a superannuation fund. Accordingly, such a contribution must be allocated to the member consistently with regulation 7.08 of the SISR.

The ATO does not accept that a contribution for a particular person is accepted to a reserve, even a reserve designated as a contributions reserve. As APRA has noted in paragraph 6 of Prudential Practice Guide Draft SPG 234 - Use of reserves in superannuation funds:

While reserves are monies that have not been allocated to members, not all unallocated monies constitute reserves. Unallocated monies that are not reserves include accounting constructs such as suspense accounts used to record contributions and rollovers pending their allocation to the account of specific fund members.

The ATO considers that together, regulation 7.08 and subparagraph 1.06(1)(a)(ii) ensure that a contribution made by an employer for an individual is allocated to an accumulation interest of the individual and cannot be applied to any interest supporting an account based pension payable to the individual.

Meeting discussion

The ATO reiterated the view that an amount cannot be transferred from a contributions reserve to a pension once the pension has commenced to be paid.

Members accepted the ATO's initial response. The chair gave way for the TIA representative to raise this again at the June meeting if needed.

No further comments received.

1.7 Other business/close of meeting

Focussing questions/statements

¦ Impact of MW McIntosh Pty Ltd and Anor v. Federal Commissioner of Taxation

¦ Excess contributions tax (emerging issues)

¦ Members to raise other issues

1.7.1 Approved forms - extension of time - impact of MW McIntosh Pty Ltd and Anor v. Federal Commissioner of Taxation

The ATO outlined that the main NTLG is considering a question about the decision in MW McIntosh Pty Ltd and Another v. Federal Commissioner of Taxation [2009] FCAFC 88; (2009) 178 FCR 100; (2009) 2009 ATC 20-119; [2009] ALMD 6214.

This case held the Commissioner does not have the power to extend the time limit to consolidate a group of companies. This decision may impact on other notices that must be given in an approved form, such as the notice of intention to deduct contributions. It might also apply to other things, such as actuarial certificates that must be obtained by a specified time such as the lodgement date of a tax return.

The ATO response to this will be provided at the main NTLG later in March.

The members asked what would be the issue with the Commissioner giving an extension in cases where there was a genuine mistake. If a personal deduction is claimed for superannuation contributions (for instance) as long as the tax is paid why would this be an issue from a policy perspective?

The ATO said that prior to the McIntosh Pty Ltd decision, the ATO assumed it had the power to extend the time to give an approved form under 388-55 of Schedule 1 to the Taxation Administration Act 1953 (TAA). This may have changed now the court's decision has been handed down. If it is found the Commissioner cannot extend time to lodge Treasury will be informed to see if they think it is appropriate to amend the legislation to allow the Commissioner to extend time in certain circumstances.

Extract from main NTLGs action item: NTLG0912/06

Review the circumstances for the application of the Commissioner's discretion to extend compliance time frame in light of the High Court decision in the McIntosh case. Members to identify issues to be addressed as part of this process.

Applying the reasoning of the Full Federal Court in M W McIntosh v Federal Commissioner of Taxation, we consider that the language and context of section 290-170 of the ITAA 1997 and section 388-55 of Schedule 1 to the Taxation Administration Act 1953 indicate that the Commissioner does not have power under section 388-55 to extend the time for the lodgment of the relevant notice under section 290-170.

Section 290-170 sets out certain conditions which must be satisfied for a taxpayer to be able to deduct superannuation contributions. A valid notice must be given to the trustee of the relevant fund or RSA provider and that notice must be given by the time provided for in paragraph 290-170(1)(b). That time is the earlier of the date of lodgment of the taxpayer's income tax return for the year in which the contribution was made and the end of the next income year. A further requirement is that the trustee or provider must have given the taxpayer an acknowledgement of receipt of the notice.

No extension of time for lodgment of the notice is provided for by the section and there is no reference or mention by way of statutory 'Note' to section 388-55.

To the extent that the time allowed for lodgment of the notice is linked to the lodgment date of the taxpayer's return, that is a matter within the taxpayer's control. As was the case in McIntosh, a taxpayer may separately seek an extension of time to lodge the tax return and in that way effectively extend the time for lodgment of the section 290-170 notice, subject to the end time limit provided for.

The context in which section 290-170 arises also supports a legislative intention to set a fixed time period for lodgment of the notice.

Whether a taxpayer is entitled to a deduction for superannuation contributions (to which a section 290-170 notice relates) has a close interaction with other taxation entitlements and obligations, specifically in relation to superannuation co-contributions, excess contributions tax and the taxation position of a superannuation fund or RSA provider.

Further, sub-section 290-180(1) does not permit a valid notice under section 290-170 to be revoked or withdrawn. Sub-section 290-180(3) provides a mechanism for the variation of notices (only to reduce the amount stated in relation to the contribution). The time limit generally provided for such variations mirrors the time limit contained in section 290-170: see s. 290-180(3).

These limitations combine with the language of section 290-170 to suggest a legislative intention to ensure certainty and finality and reducing administrative burdens for the taxpayer and other parties affected by the notices.

1.7.2 Excess contributions tax (emerging issues)

The chair also mentioned that there were two excess contributions tax (ECT) issues currently around:

¦ An ATO ID had been circulated to members for comment on 'mistake' and circumstances where it can be used to avoid an ECT liability. The ATO would like comments back within a week, but will allow a short extension time if sought.

¦ Some superannuation trust deeds have been amended to cause 'rejection' of contributions if the contributions would exceed ECT. The ATO is currently looking at this issue to determine if it will prevent an ECT liability, particularly as the return on contributions may not happen in a timely way. Our preliminary view is that it appears to operate in a way contrary to Division 292 of the ITAA 1997. A taxpayer alert or other advice will issue when the ATO view is finalised.

A member said that they were concerned that the Commissioner was taking a hard line in terms of ECT and they were not sure that it was warranted under the terms of the legislation. They said that the idea was contributions should be made throughout the life of a member, if mistake occurred it should be special circumstances that allow the return of contributions.

The ATO said that they are trying to differentiate between a genuine mistake that justifies restitution under the law and those errors that don't. For instance a circumstance where someone intended to make a payment for something unrelated to superannuation but accidentally made it to their superannuation fund would be a case of mistake that justifies restitution.

The Commissioner's approach is to apply the law as written. Further, the law does actually specify certain matters that the Commissioner may consider when considering the exercise of the discretion to disregard or reallocate a contribution. One of these is whether it was reasonably foreseeable that a contribution would exceed the caps - see subsection 292-465(6) of the ITAA 1997 and the Explanatory Memoranda that introduced this provision.

A member asked if something was held in a separate trust can you say that the contribution has been made if it has not been accepted under the trust deed.

The ATO said the Commissioner was looking at just what constraints the law imposes. The issue is being given high priority due to its sensitivity, as well as consulting with the industry.

A member also asked if they should respond to this issue when they provided comments on the draft ATO ID. The ATO said they were welcome to respond but asked that comments were kept in separate documents to try and keep the two issues separated.

1.7.3 Other issues

The chair asked if there were any other issues.

A member raised issues they had with part of TR 2010/1 and the view expressed in relation to the circumstances when a notice of intention to deduct a superannuation contribution will not be valid. They said the interpretation adopted by the Commissioner cannot be administered within existing computer systems.

The ATO said the final view had been adopted taking into account a number of comments received. It appeared to be the only appropriate outcome given the terms of the legislation.

The member suggested that both IFSA and Association of Superannuation Funds of Australia (ASFA) may make submissions to the ATO on the systems implications of the interpretation. The ATO advised that some concern had also been raised during a recent Software Developers Consultative Group meeting.

A member asked for details of statistics that had been provided to the meeting of the Superannuation Consultative Committee. The statistics are attached to these minutes.

A member also mentioned that section 66 of SIS Act (and possibly other provisions) contain an exception to certain regulatory restrictions that apply where the trustee of a regulated superannuation fund acquired the assets under a merger between regulated superannuation funds. They asked if any advice had been provided by the ATO around when two superannuation funds were merging.

The ATO said they were not aware of any. APRA confirmed that there is significant information available on successor fund issues but were not aware of any information with respect to the situation of SMSFs merging.

^[H24]Next meeting

The chair confirmed the next meeting would be held in Melbourne on 15 June 2010

Meeting details

Venue:

Attendees

Apologies

[H2]Agenda items

Disclaimer

1.1 Open and introductions

1.2 Previous minutes

1.3 Action items

Action item

NTLGSPR 160609/4

1.4 Update on recently published and withdrawn public rulings, practice statements and ATO IDs

Ruling topic

Product

Product

1.5 Litigation

1.6 Technical questions raised by members

1.6.1 Application of the 10% test when leave entitlements due in June are paid in July

1.6.2 Segregated current pension assets

Action item

NTLGSPR 090310/1

1.6.3 Concessional contribution cap: individual does not reach age 50

1.6.4 Deductions for increased amount of superannuation lump sum death benefits

1.6.5 Deductions for increased amount of superannuation lump sum death benefit where the benefit arises from the commutation of a pension

Reference

NTLGSPR 080909/03

1.6.6 Binding death benefit nomination verses reversionary pensions

1.6.7 Determination of certain timeframes when a member dies and probate is not obtained

1.6.8 Source of anti-detriment payments

1.6.9 Unit trusts and non arm's length income

1.6.10 Trustee of superannuation fund

1.6.11 Allocations from contribution reserves to capital of pensions

1.7 Other business/close of meeting

1.7.1 Approved forms - extension of time - impact of MW McIntosh Pty Ltd and Anor v. Federal Commissioner of Taxation

1.7.2 Excess contributions tax (emerging issues)

1.7.3 Other issues

[H24]Next meeting

^[H2]Agenda items

^[H24]Next meeting