Edited version of administratively binding advice

Authorisation Number: 1011828400849

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Advice

Subject: Amendment of trust deed and notional taxed contribution (NTC) grandfathering

Questions

1. Will the proposed trust deed amendments prevent continued grandfathering of notional taxed contributions (NTC) at an amount equal to the concessional contributions cap under subsection 292-170(8) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer: No.

2. Will the proposed trust deed amendments cause additional NTC under section 292-170 of the ITAA 1997 for defined benefit members whose NTC is below the concessional contributions cap (the grandfathering limit) or whose NTC cannot be limited by the grandfathering?

Answer: No.

Relevant facts and circumstances

A complying superannuation fund (the Fund) has 5 or more defined benefit members.

Currently the Fund's trust deed provides that where a defined benefit member who is in receipt of a disablement pension also has a child who is disabled, then an additional pension amount is also paid in favour of that child.

The additional pension amount that is paid in favour of that child is calculated as a percentage of the pension amount payable to the member (or which would be payable to the member upon retirement age 65). Payments of the additional disabled child pension amount cease when the child dies or when the child recovers from permanent disablement.

The trustee of the Fund is proposing to amend the Fund's trust deed so that additional disabled child pension amount:

(a) will no longer commence to be payable in favour of disabled children of disabled members (those that have already commenced being permitted to continue);

(b) but will, instead, be payable to disabled members, on the same terms and conditions as it would be payable in favour of disabled children.

After the proposed amendments are effective, the additional pension amount in respect of a disabled member's disabled child will be received by the disabled member for their own benefit. It will not be received by the disabled member as agent of, or trustee for, their disabled child.

Upon the death of a disabled member, any remaining payments of the additional disabled child pension amount will be made to the surviving disabled child.

Although such double-disablement condition catered for by the trust deed would rarely occur, should the proposed trust deed amendments result in any loss of NTC grandfathering allowed by subsection 292-170(8) of the ITAA 1997, a large number of members will be affected. This will be of major commercial significance to the Fund.

Administratively binding advice (ABA) on the first question is sought with respect to the reporting of contributions for all defined benefit members who have been defined benefit members since 12 May 2009 and for whom:

(a) the method of calculating superannuation salary has not changed since that date [sub-regulation 292-170.07(3) of the Income Tax Assessment Regulations 1997 (ITAR)];

(b) if the rate of superannuation salary has increased since that date by more than the percentages prescribed in sub-regulation 292-170.07(4) of the ITAR, advice that the increase in rate was at arm's length was given by the employer sponsor to the trustee of the Fund; and

(c) discretions have not been exercised since that date to pay benefits greater than that assumed for the purpose of calculating the new entrant rate [sub-regulation 292-170.07(5) of the ITAR].

An ABA on the second question is sought with respect to reporting of contributions for all defined benefit members.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 292-160(1).

Income Tax Assessment Act 1997 Section 292-165.

Income Tax Assessment Act 1997 Subsection 292-170(1).

Income Tax Assessment Act 1997 Subsection 292-170(2).

Income Tax Assessment Act 1997 Subsection 292-170(3).

Income Tax Assessment Act 1997 Subsection 292-170(4).

Income Tax Assessment Act 1997 Subsection 292-170(5).

Income Tax Assessment Act 1997 Subsection 292-170(8).

Income Tax Assessment Act 1997 Section 292-175.

Income Tax Assessment Regulations 1997 Regulation 292-170.01.

Income Tax Assessment Regulations 1997 Regulation 292-170.02.

Income Tax Assessment Regulations 1997 Regulation 292-170.07.

Income Tax Assessment Regulations 1997 Regulation 995-1.01.

Income Tax Assessment Regulations 1997 Schedule 1A.

Taxation Administration Act 1953 Schedule 1, Section 357-55.

Reasons for decision

Summary

The proposed trust deed amendments will not prevent continued grandfathering of NTC for members who have been defined benefit members since 12 May 2009. Similarly, the proposed trust deed amendments will not cause additional NTC for all defined benefit members.

Detailed reasoning

Continued grandfathering of NTC

Under the proposed trust deed amendments, an additional disabled child pension amount is to be paid to a disabled member instead of being paid to the disabled member's disabled child (as is currently the case under the Fund's rules). There is certainly an increase in the disabled member's benefit as a result of the amendments. However, the Commissioner accepts your comment that this does not add to the Fund's benefit funding cost as there is only a change in the identity of the person receiving the additional child disablement pension amount (from the disabled child to the disabled member).

For a member holding a defined benefit interest in a superannuation fund on 12 May 2009, subsection 292-170(8) of the ITAA 1997 provides that the member's NTC for a financial year is equal to the member's concessional contributions cap for that financial year if all the requirements in that subsection are satisfied. One of the requirements is that the conditions specified in regulation 292-170.07 of the ITAR are satisfied.

The condition under sub-regulation 292-170.07(2) of the ITAR is that the new entrant rate for the member has not increased since 12 May 2009, unless the increase is the result of a change made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992 (SGAA). Since the proposed amendments to the trust deed have nothing to do with any changes made to satisfy any SGAA requirements, it is necessary to determine if the new entrant rate will be increased by the proposed amendments.

As provided in subsection 2.1(1) of Schedule 1A to the ITAR, the new entrant rate is calculated under Part 2 of Schedule 1A, and using the assumptions set out in Part 3 of Schedule 1A. Subsection 2.1(2) states that:

The new entrant rate for a benefit category is the rate that represents the long-term cost, expressed as a percentage of superannuation salary, of providing as much of the fund benefit as is payable on a voluntary exit to a hypothetical new entrant to the benefit category.

In subsection 2.1(3) of Schedule 1A to the ITAR, a 'voluntary exit' refers to resignation, early retirement, or retirement. On the other hand, the assumption on exit rates as set out in subsection 3.7(2) of Schedule 1A, to be used when calculating the new entrant rate for a benefit category, is that the rate of involuntary exit (including by redundancy, death or invalidity) is zero.

Based on the above, you are of the view that benefits received due to ceasing employment in involuntary circumstances, such as disability, should not impact the new entrant rate calculation. The Commissioner concurs with your view.

With respect to sub-regulation 292-170.07(3) of the ITAR, you stated that the method of calculating superannuation salary has not changed since 12 May 2009.

In relation to sub-regulation 292-170.07(4) of the ITAR, you stated that if the rate of superannuation salary did increase since 12 May 2009 by more than the percentages specified in that sub-regulation, the employer-sponsor would have advised the trustee of the Fund that the increase was on an arm's length basis.

You also stated that the condition in sub-regulation 292-170.07(5) of the ITAR has been satisfied as no discretion has been exercised since 12 May 2009 to pay benefits greater than that assumed for the purpose of calculating the new entrant rate.

Based on the above, the Commissioner is of the view that the grandfathering on notional taxed contributions under subsection 292-170(8) of the ITAA 1997 should continue to be available to the Fund in spite of its proposed trust deed amendments.

Additional NTC

Under section 1.8 of Schedule 1A to the ITAR, the total amount of NTC for an accruing member of a defined benefit fund for a financial year is worked out using the following formula:

T + [1.2 × (W + X + Y + Z)]

where, for the financial year:

T is the sum of the amounts of NTC, calculated under sections 1.6 and 1.7 of Schedule 1A, for each benefit category to which the member belongs;

W is the amount that has to be included, pursuant to Part 4 of Schedule 1A and based on actuarial advice, as part of the member's NTC, being the excess of the actual benefit paid over the amount of the assumed benefit as a result of the exercise of a discretion to pay a benefit upon voluntary exit that is greater than the benefit assumed in calculating the new entrant rate;

X is an additional amount that may need to be included, pursuant to Part 5 of Schedule 1A and based on actuarial advice, as part of the member's NTC if the member's accrued retirement benefit increases as a result of a change of benefit category or as a result of an exercise of discretion;

Y is an additional amount that may need to be included, pursuant to Part 6 of Schedule 1A and based on actuarial advice, as part of the member's NTC if:

(a) the governing rules of the defined benefit fund are amended in a way that may result in an increase in the member's benefit and

(b) the amendment is made for a reason other than to satisfy a legislative requirement; and

Z is an additional amount that may need to be included, pursuant to Part 7 of Schedule 1A and based on actuarial advice, as part of the member's NTC if the member's superannuation salary is increased in a non-arm's length way with the primary purpose being to achieve an increase in superannuation benefit.

Based on the facts provided, the Commissioner agrees with your analysis that, of these additional elements, only Y should be of relevance.

With regard to Y, it is necessary to find out if the amendment to the trust deed would actually cause the increase in the value of the accrued retirement benefit. According to clause 3 of Professional Standard 405 of the Institute of Actuaries Australia (IAA) as at June 2010, 'accrued retirement benefit' means:

the amount of a prospective retirement benefit attributable to past membership or service determined in accordance with Professional Standard 402.

According to Professional Standard 402 of the IAA as at November 1994, death and disability benefits are types of accrued retirement benefits paid on death or disablement of a member. Clause 12 of Professional Standard 402 also provides methods to work out accrued death and disability benefits amounts using either a fund member's current salary or final average salary, as the case may be.

The proposed amendments to the trust deed would affect neither the current salary, nor the final average salary amount, of a member. The amendments would only affect the allocation of the disablement benefit in double-disablement cases. Instead of being paid to a disabled child, the same benefit amount will now be paid to the disabled member who is the parent of the disabled child. The Commissioner agrees that the changes to the trust deed would not result in a value for Y that needs to be included in the NTC calculation.

To sum up, the proposed amendments to the trust deed would not raise any of the additional elements W, X, Y and Z hence would not result in any additional NTC amount for defined benefit members.

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