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Edited version of private ruling
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Ruling
Subject: Income of superannuation fund
Questions:
1. Is the settlement payment made to a self managed superannuation fund (SMSF) a contribution?
2. Is the settlement payment assessable income of the SMSF?
Answers:
1. Yes
2. Yes
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commences on:
1 July 2010
Relevant facts and circumstances
During the 2008-09 income year, the Member had a personal superannuation account with a public offer fund (the Fund).
Company A is both the trustee of the Fund and the Fund's Administrator.
In the 2008-09 income year, the Member instructed the Fund to move their superannuation benefits into different investment portfolios.
Administrative delays are alleged to have occurred in relation to the Member's benefit transfer request. As a result, the Member's benefits in the Fund were reduced due to the global financial crisis.
The Member has a dispute with the trustee of the Fund regarding the economic loss.
The Fund's Administrator has agreed to settle the dispute. The dispute was resolved by agreement documented in a Deed of Release (the Deed).
Under the Deed, the Member will be awarded with a settlement amount. A subclause of the Deed provides for Company A to pay the settlement amount to the Member's self managed superannuation (SMSF).
This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.
Relevant legislative provisions:
Income Tax Assessment Act 1997 section 292-25
Income Tax Assessment Act 1997 section 295-160
Reasons for decision
Summary
The settlement amount is considered to be a contribution as it increases the capital of the self managed superannuation fund (SMSF). Consequently, the settlement amount to be made by the Fund's Administrator to the SMSF for the benefit of the Member would be treated as assessable income of the SMSF.
Detailed reasoning
Superannuation as an investment is accessed via membership of a superannuation fund. Its primary purpose is to take in contributions from and/or on behalf of its members, to invest those contributions, and thereby to accumulate monetary benefits to be paid out to its members as they retire from the workforce, or to its members' dependants should the members die.
Taxation Ruling TR 2010/1 discusses the Commissioner's view on the ordinary meaning of contributions. Paragraph 4 of TR 2010/1 states:
In the 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 of the members in general.
The capital of a superannuation fund may be increased 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.
As can be seen from the foregoing, there are three avenues via which monies can be paid into a superannuation fund. That is:
· contributions by members or by other persons on behalf of the member;
· income on investments held by the superannuation fund; or
· a specific roll-over amount.
It is noted in the facts that the Member had a personal superannuation account with a public offer fund (the Fund). Due to administrative delays alleged to have occurred in relation to the Member's benefit transfer request into different investment portfolios, the Member's benefits in the Fund were reduced.
The Fund's Administrator agreed to resolve the dispute with the Member. The dispute was resolved by an agreement documented in the Deed. The Member will be awarded a specific amount (the settlement amount) for the economic loss suffered. The settlement amount will be made into the Member's SMSF.
Although the settlement amount is compensation for a right to lost superannuation benefits, the act of paying the settlement amount into the SMSF means that the capital of the SMSF has increased.
Further, as the settlement amount is being made to compensate the Member for lost superannuation benefits, the payment to the SMSF is clearly being made 'for the purpose of the provision for superannuation benefits' for the Member.
Additionally, the payment to be made into the SMSF will not be made by the Member but by the Fund's Administrator in accordance with the Deed. Therefore, the direct payment of the contribution into the SMSF by the Fund's Administrator represents a contribution that was made by one person for the benefit of another person.
As the settlement payment is 'made for the purpose of making provision for superannuation benefits for another person', and it is neither income on investments held by the superannuation fund nor a specified roll-over amount therefore it can only be a contribution.
Contributions to a complying superannuation fund
Section 295-160 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines what contributions and payments are included in the assessable income of a superannuation entity. Item 1 of the table in section 295-160 of the ITAA 1997 states that the assessable income of complying superannuation funds, non-complying superannuation funds that are Australian superannuation funds for the income year and retirement savings accounts (RSAs), includes a contribution to provide superannuation benefits for someone else (except a contribution that is a roll-over superannuation benefit).
As previously determined, the settlement payment is considered as a contribution. Consequently, the settlement payment to be made directly by the Fund's Administrator to the SMSF for the benefits of the Member would be treated as assessable income of the SMSF under this provision.
Concessional contributions
A contribution will be a concessional contribution for a financial year if it is made to a complying superannuation fund or complying RSA in respect of the member and it is included in the assessable income of the superannuation provider in relation to the fund or RSA (paragraphs 295-25(2)(a) and 295-25(2)(b) of the ITAA 1997).
Concessional contributions include employer contributions, salary sacrifice contributions and personal contributions claimed as a tax deduction by a self-employed person.
Concessional contributions do not include:
· so much of an amount that is transferred to a superannuation fund from a foreign superannuation fund and is included in the assessable income of the fund as a result of a choice made under section 305-80 of the ITAA 1997 (subparagraph 292-25(2)(c)(i));
· an amount that is a roll-over superannuation benefit to the extent that it contains an untaxed element that is not an excess untaxed roll-over amount (subparagraph 292-25(2)(c)(ii));
· a contribution made to a constitutionally protected fund (subparagraph 292-25(2)(c)(iii)).
As previously discussed, the settlement amount is considered to be a contribution which is 'made for the purpose of making provision for superannuation benefits for another person'. Accordingly, it is included in the assessable income of the SMSF under Item 1 of the table in section 295-160 of the ITAA 1997.
As the settlement amount is a contribution which is to be included in the assessable income of the SMSF should be treated by the trustee of the SMSF as a concessional contribution for the relevant financial year.
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