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Ruling

Subject: Pooled superannuation trust and exempt current pension income

Question 1

Is the Trust B Pooled Superannuation Trust's current approach in calculating exempt income referable to investments held by its unitholders on behalf of their pension members in accordance with subsection 295-400(3) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

xx/xx/xxxx to xx/xx/xxxx

The scheme commences on:

xx/xx/xxxx

Relevant facts and circumstances

Trust B is a pooled superannuation trust (PST) as defined in section 48 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

On XX XXX 20XX, Trust B was established by way of trust deed.

Trust B acts as an investment vehicle for a number of complying superannuation funds which hold units in Trust B. Investments are pooled in Trust B and the trustee bears the tax liability that arises on those investments in accordance with Division 7 of Part IX of the Income Tax Assessment Act 1936 (ITAA 1936).

The units available for acquisition by unitholders of Trust B include:

· Taxed units.

· Untaxed units.

· Defined Benefit units, which are wholly taxed units.

· Term Pension units, which are wholly untaxed units.

Trust B calculates and claims exemption in respect of part of its assessable income pursuant to its own interpretation of subsection 295-400(3) of the Income Tax Assessment Act 1997 (ITAA 1997).

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 7

Income Tax Assessment Act 1997 Division 295

Income Tax Assessment Act 1997 section 295-385

Income Tax Assessment Act 1997 section 295-390

Income Tax Assessment Act 1997 section 295-400

Income Tax Assessment Act 1997 subsection 295-400(3)

Superannuation Industry (Supervision) Act 1993 section 48

Reasons for decision

Legislation

PSTs are entitled to an exemption for part of their assessable income which is attributable to the current pension liabilities of its unitholders. Sections 295-385, 295-390 and 295-400 of the ITAA 1997 set out the methods of calculating this exempt proportion.

Section 295-385 of the ITAA outlines the segregation method which provides that if a complying fund segregates its assets so that the income can be identified as derived from the segregated assets held to provide for current pension liabilities then that income is exempt income.

Section 295-390 of the ITAA outlines the percentage method which provides a formula for calculating the proportion of exempt pension income in cases where income is derived from assets that are not segregated between current pension liabilities and other liabilities. This is calculated by dividing the fund's average value of current pension liabilities (excluding liabilities for which segregated current pension assets are held) by the fund's average value of superannuation liabilities (excluding liabilities for which segregated current pension assets or segregated non-current assets are held).

Section 295-400 of the ITAA relates specifically to PSTs and sets out a formula for calculating the portion of income where the unitholder segregates current pension assets. Alternatively under subsection 295-400(3) of the ITAA the trustee of a PST can choose that a different amount be exempt income of the trust (if a percentage of the assessable income of the trust would have been exempt income under section 295-385 or 295-390 of the ITAA if it had been derived instead by the unitholders in the trust in proportion to their holdings).

Taxpayer's contentions

Trust B argues that the terms 'in proportion' and 'percentages' should not be interpreted literally and that subsection 295-400(3) of the ITAA 1997 should be read as a whole. Trust B states that it is clear that the intention of the Act is to make exempt current pension income (ECPI) claimable by the PST reflect, as best as possible, the amount that would have been exempt income under section 295-385 or 295-390 of the ITAA 1997 if the assessable income of the PST had been derived instead by the unitholders in the PST in their appropriate share.

Trust B claims that adhering to the strict wording of 'in proportion' would produce inequitable and unsuitable results in cases where there a multiple classes of units within the PST. In such cases the appropriate quantum of ECPI is not capable of being stated as a single percentage or proportion but rather is only capable of being stated as a dollar amount or as a percentage of each class of units (with that percentage potentially different for each such class).

Trust B argues that the strict words of subsection 295-400(3) of the ITAA 1997 and particularly the references to 'percentage' and to 'in proportion to their holdings' do not appear to provide an appropriate basis for calculation of ECPI of a PST where:

An underlying superannuation fund unitholder would have selected the segregated method of section 295-385 of the ITAA 1997 in respect to all or part of the assets held by the PST if those assets had instead been held directly by that superannuation fund unitholder.

There are multiple classes of units within the PST, such that calculations based on weighted average unitholdings are neither feasible nor equitable.

This corresponds with Trust B's circumstances as it has multiple classes of units and at least one of its unitholders (LASF) previously claimed ECPI partly pursuant to the segregated method. In their view, where there is a clear nexus between each particular unitholder within a PST and an asset held by that PST, the need for percentages and proportions based on numbers of units held becomes superfluous, and the application of the strict words of subsection 295-400(3) of the ITAA 1997 in these circumstances may defeat the purpose of Division 295 of the ITAA 1997.

Taxpayer's methodology

Trust B has sought to apply subsection 295-400(3) of the ITAA 1997 based on its own interpretation of the policy intention of Division 295 of the ITAA 1997. This calculation is based on:

The exemption of all assessable income where there is a clear nexus between the pension members and particular assets (the equivalent of the section 295-385 of the ITAA 1997 segregated calculation for members within the PST's unitholders with this clear nexus with particular assets).

The exemption of the relevant percentage of the assessable income derived from the assets referable to a particular unitholder's current pension members (the equivalent of the section 295-390 of the ITAA 1997 percentage calculation) for each identifiable pool of assets held by each unitholder on behalf of current pension members where there is no clear nexus between the member and a particular asset.

Trust B claims that this method will ensure that the ECPI claimed will demonstrably equate to that which would have been claimed by the unitholder superannuation funds had the unitholder instead held Trust B's assets directly. It has sought to do this by:

· Firstly, calculating the relevant assessable income in each class.

· Secondly, allocating this to the investment options, including both options (wholly representing account-based and term pension members of underlying unitholders (untaxed units), wholly representing accumulation members (taxed units) and representing defined benefit members (taxed units) based on the average dollars invested by each investment option in each class.

· Thirdly, calculating ECPI as the total of:

Any amounts allocated to untaxed units.

A percentage of the amounts allocated to the Defined Benefit units reflecting the actuary's certification of the percentage of total defined benefit liabilities referable to current defined benefit pension liabilities.

Finally, appropriate reductions in otherwise deductible expenses and foreign income tax offsets are made in accordance with the same broad methodologies.

The calculation of ECPI for the amounts allocated to untaxed units broadly equates to applying the exemption to all assessable income where there is a clear nexus between the pension members and particular assets. The assets underlying the untaxed units could not have been completely segregated if they were held instead by the underlying unitholders, as the untaxed units reflect shares of overall pools initially calculated at the level of asset classes rather than options. However, there is nonetheless broad equivalence between the ECPI allocated to the untaxed units in this way and the equivalent of a section 295-385 of the ITAA 1997 segregated calculation for Trust B's unitholders in respect of their account-based and term pensioners.

Similarly, the calculation of ECPI based on a percentage of the amounts allocated to the Defined Benefit units broadly equates to applying an exemption of the assessable income derived from the assets referable to a particular unitholder's current pension members (that is, the equivalent of the section 295-390 of the ITAA 1997 percentage calculation) for each identifiable pool of assets held by each unitholder on behalf of current pension members where there is no clear nexus between the member and a particular asset. In particular, the identifiable pool of assets in this case are those held by Trust B on behalf of LASF's defined benefit members and the percentage reflects the percentage of defined benefit pensions for whom there is no clear nexus with any particular asset.

Accordingly, Trust B concludes that the ECPI claimed under this method broadly equates to an amount claimable by the unitholder superannuation funds if they instead held the assets of Trust B directly and is therefore in accordance with the policy intent of subsection 295-400(3) of the ITAA 1997.

Furthermore, Trust B claims this method will produce a result that is more consistent with the equitable allocation of relevant tax benefits to pension members. It states this equity outcome is superior to that of many other superannuation funds using solely the percentage method, where the value of the tax benefits from ECPI in the income tax return will only equal the sum of the value of these tax benefits allocated to individual pension members if the proportion of pension members in each investment option is identical to the proportion of accumulation-phase members in each such investment option. In all other cases the value of the tax benefits from ECPI in the income tax return will either be greater or less than the sum of the value of these tax benefits as allocated to individual pension members.

To illustrate the above Trust B has provided worksheet examples of three different funds using the percentage method of section 295-390 of the ITAA 1997 (Fund A) a mixture of the segregation method of section 295-385 of the ITAA 1997 and the percentage method (Fund B) and the third using equivalent calculations for a PST in which in which Fund A and Fund B are the sole two unitholders based on the methodology applied by Trust B (see appendix). Trust B submits that these worksheets illustrate that the tax payable by the PST using their methodology will always produce a result which is wholly consistent with the equitable allocation of relevant tax benefits to the pension members and this adds force to the argument that this methodology is wholly in accordance with the policy intent of subsection 295-400(3) of the ITAA 1997.

Statutory analysis

Trust B has in effect argued that the purposive approach to statutory interpretation should be applied regarding the application of subsection 295-400(3) of the ITAA 1997. In deciding whether to apply the literal or purposive approach to statutory interpretation in this case, reference can be made to the decision of the High Court in Cooper Brookes (Wollongong) Pty Ltd v. FCT (1981) 147 CLR 297 where several members of the Court declined to adopt a literal construction which would have defeated the object or purpose of the enactment. At 320-321 Mason and Wilson JJ stated that departing from the ordinary grammatical sense is not restricted to cases of absurdity or inconsistency. Their Honors stated at 321 that:

… when the judge labels the operation of the statute as "absurd", "extraordinary", "capricious", "irrational" or "obscure" he assigns a ground for concluding that the Legislature could not have intended such an operation and that an alternative interpretation must be preferred. But the propriety of departing from the literal interpretation is not confined to situations described by these labels. It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions.

The Explanatory Memorandum to the Taxation Laws Amendment (Superannuation) Bill (No. 2) 1989 (Cth) which introduced subsection 297B(3) provides that:

This Bill includes provisions which entitle PSTs to a "vicarious" exemption from tax in respect of the part of their income that is derived from their business with complying superannuation funds which, to the Commissioner's satisfaction, had it been derived directly by the funds would have been exempt under either of the options discussed in the previous section of this memorandum. PSTs will be entitled alternatively to claim the exemption in the proportion that the unitholdings of complying superannuation funds that are segregated current pension assets (see the explanation in the previous section) bear to the total unitholdings in the PST.

The Explanatory Memorandum strongly suggests that the purpose of Division 295 of the ITAA 1997 is to exempt an amount of assessment income of the PST equal to an amount that would have derived instead by the unitholders.

It is possible that PSTs in the same circumstances as Trust B, that apply a literal interpretation of subsection 295-400(3) of the ITAA 1997, could calculate ECPI amounts that differ to the amount of tax that the unitholders would have claimed if they had held their units directly.

Under the purposive approach, the use of the words 'in proportion' may be interpreted to mean an amount that would have corresponded to that derived by the unitholders had they held the assets of the PST directly. It would not solely be a proportion just in order to meet the wording of the provision. If the strict words of 'in proportion' were not applied to Trust B the amount of ECPI claimed by Trust B would approximate the amount that would have been derived by the unitholders directly.

Therefore, adopting a literal interpretation of the phrase 'in proportion' in subsection 295-400(3) of the ITAA 1997 would not accord with the purpose and intent of the legislation and thus produce an unreasonable result. Adopting the purposive approach provides a construction of subsection 295-400(3) of the ITAA 1997 that promotes the object and purpose of the legislation and is therefore a preferred construction.

Conclusion

The Commissioner is satisfied that the approach used by Trust B in calculating ECPI, in accordance with their interpretation of subsection 295-400(3) of the ITAA 1997, is in accordance with the policy intent of the legislation. However, this approach is restricted to circumstances, such as Trust B's, where it would approximate ECPI amounts that mirror amounts that would have been claimed by the unitholders had they held the assets of Trust B directly.

When applying this approach Trust B would be required to provide sufficient information to the Commissioner so that the Commissioner is satisfied that the approach used to self-assess the ECPI is valid and workable.

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