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Authorisation Number: 1012404176423

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Advice

Subject: Notional taxed contributions

Relevant facts and circumstances

The Applicants propose a restructure of the superannuation arrangements for members of their current employer sponsored defined benefit fund, (the Current Fund) involving the transfer of members from this fund to a new defined benefit sub-plan (the New Fund) within a regulated superannuation fund.

Background

The Original DB (defined benefit) Fund is a superannuation fund established by declaration of trust (the Trust Deed) well prior to 1993. Since its inception, the Current Fund has been a defined benefit superannuation fund, with the benefits to which members are entitled being determined by the provisions of the Trust Deed as amended from time to time. All benefits are funded solely by the employer and relevant associated companies (the Company).

The Current Fund has a range of benefit categories and provides a range of benefits.

Proposed Restructure

The Company considers that it would be in the interests of the members (and the sponsoring employer) if superannuation benefits were provided via a simplified modern benefit design, common to the majority of current employees. In particular, the Company wishes to implement a new plan with a benefit design that meets the following criteria:

· a simple, modern benefit design that is more easily communicated and understood by members;

· simpler and more cost efficient administration;

· entitlements that are equivalent in value to the members and cost to the Company; and

· enables the retention of the 'grandfathering' of the contributions cap for the purposes of the determining notional taxed contributions under Division 292 of the ITAA 1997.

Establishment of New Fund

The Company has explored different options for restructuring its superannuation arrangements and has settled on the structure of the New Fund, to be established as follows:

(a) a successor fund transfer of the benefits of certain members to the New Fund (Successor Members) with a replicated benefit design (Successor Fund Divisions)

(b) the establishment of new defined benefit interests for the remaining members who may also consent to the transfer of their accrued benefits in the Current Fund to the New Fund (Consent Members) with a new benefit design equivalent both in value to the members and cost to the Company (Modern Division).

All members will cease to hold a superannuation interest in the Current Fund. If a member does not consent to the transfer of their accrued benefits to the New Fund their superannuation interest will be transferred to a regulated superannuation fund of their choice.

The trust deed of the New Fund will contain a participation schedule in respect of the Modern Division which will establish a liability on the part of the Trustee in relation to each Consent Member. The initial value of that liability at the time of transfer for Consent Members will equal the amount of the Consent Member's superannuation lump sum that the member could be paid immediately before the transfer, plus an amount that represents the accrued portion of the member's other benefits. That is, if the Consent Member were to leave (before completing an additional day's service) after the transfer they would receive a leaving service benefit from the New DB Fund of an amount equal in value to the leaving service benefit they would have received from the Original DB Fund immediately prior to the transfer, plus an additional amount representing the value of other accrued benefits provided by the Original DB Fund that are not provided by the New DB Fund.

Although the structure of the benefits will change, and many of the key provisions and rights relating to the benefits provided by the Original DB Fund will not be replicated in the Modern Division of the New DB Fund, the value of the benefits provided by the Modern Division has been assessed to be actuarially equivalent in aggregate to the benefits provided by the Original DB Fund and the cost of providing the benefits has been assessed to be the same as per the actuarial report provided. Further, in accordance with regulation 292-170.08(2), the actuary has certified that the new entrant rate for each benefit category (calculated in accordance with Part 2, Schedule 1 of the ITAR 1997) in the New DB Fund will be no greater than those that currently apply in the Original DB Fund.

New benefit design

The benefit design of the Modern Division of the New DB Fund will provide for a new simplified suite of benefits in place of the benefits provided by the Original DB Fund. While the benefits in the Modern Division will not be identical to the benefits provided by the Original DB Fund, the benefits will be actuarially equivalent for Consent Members in aggregate to the benefits provided by the Original DB Fund.

The various benefits in the Original DB Fund will be replaced by two benefits, being a leaving service benefit (including, where relevant, an additional leaving service benefit) and a death-in-service benefit.

Phasing-in rules will apply in relation to the new benefit design to avoid any increase in the value of overall benefits. The phasing-in rules will include the use of a 'Benefit Multiple' (to reflect service in the new fund) and a 'Transfer Multiple' (to reflect service in the original fund) and also the following transitional arrangements.

(a) The replacement of the resignation, withdrawal or leaving service benefit based on accumulation of the member's notional contributions with a leaving service benefit based on length of service and salary.

Under the Original DB Fund, the benefit for members who cease service before being eligible for a retirement benefit is based on an accumulation of the member's notional contributions. Under the Modern Division it is proposed that this benefit will be replaced by an amount instead based on length of service and salary, with no distinction between retirement and otherwise leaving service (but the benefit is reduced by 2% simple for each year before age 55, with a maximum reduction of 50%).

For individuals under age 55 this means that the new benefit design, without transitional rules, could potentially result in a higher amount being payable immediately following transfer. To ensure that this does not occur, the new leaving service benefit will be subject to a phase-in period of up to 5 years.

Members with less than 5 years until age 55 at the date of transfer will have a reduced phase-in period such that the new benefit becomes fully payable from age 55. Any member who has already reached age 55 at the date of transfer will have no phase-in period as they would generally be eligible for the service and salary based retirement benefits in the Original DB Fund.

(b) Transitional rules relating to the replacement of contingent benefits in retirement with an additional leaving service benefit.

Under the Original DB Fund, certain minimum benefits may be payable after retirement. Under the Modern Division these minimum benefits (the largest value component being the DBIR Compromise benefit payable on the later of retirement and age 65) will be replaced by an additional component payable on leaving service.

Replacing contingent benefits in retirement with an additional component payable on leaving service necessarily increases the amount of the leaving service benefit immediately payable (but, in return, extinguishes contingent benefits). To ensure that there is no immediate increase in overall benefits (taking into account the extinguishment of the contingent benefits) the additional component of the leaving service benefit will be phased in over a period of up to 5 years. Members with less than 5 years until the normal retirement date at the date of transfer will have a reduced phase in period such that the new benefit becomes fully payable from the normal retirement date.

The impact of the restructure on family law payments

A number of the members' benefits in the Original DB Fund are subject to payment flags that have been imposed on the members' benefits in accordance with the Family Law Act 1975 (FLA).

Under the restructure, the transfer of members' benefits to the New DB Fund, whether by successor fund transfer or by consent, may be a 'splittable payment', as defined at section 90ME of the FLA. While a payment flag is in force, the superannuation fund trustee is prohibited from making a 'splittable payment' of the member spouse's superannuation interest (sections 90ML(4) and (4A) of the FLA), unless the 'splittable payment' arises by way of a successor fund transfer (sections 90MLA and 90MUA of the FLA).

(a) Successor Fund Members

Under the restructure, the Successor Fund Members' benefits that are subject to payment flags will be transferred to the New DB Fund without being subject to a split between the member spouse and non member spouse. The payment flag will continue to operate on those members' superannuation interests in the New DB Fund (sections 90MLA(2) and 90MUA(2)).

(b) Consent Members

In the case of a Consent Member whose benefit is subject to a payment flag, the benefit may only be transferred from the Old DB Fund to the New DB Fund if the payment flag ceases to apply. This can occur if the payment flag is terminated by court order or if the parties enter into a flag lifting agreement (sections 90MM and 90MN of the FLA). For payment flags imposed by a court, if the member and non member spouse do not enter into a flag lifting agreement or apply for a court order to terminate the flag, the trustee must seek the leave of the court to make the splittable payment. Under a flag lifting agreement, the parties can agree either to split the superannuation interest between them before the transfer, or that the entire interest be transferred without being subject to a split (section 90MN of the FLA). A court may also make a splitting order under section 90MT of the FLA to split the superannuation interest.

It is proposed that the initial value of all members' benefits in the New DB Fund will not take into account whether a payment is made to the non member spouse before the transfer. That is, the member benefits will continue to be calculated on a 'gross basis' without regard to whether or not the non member spouse received a payment prior to the member's benefits being transferred to the New DB Fund. The amount that the member will actually be entitled to be paid on retirement or resignation will ultimately be reduced by a fixed formula representing 'notional' entitlements of the non member spouse, regardless of whether the non member spouse has a 'real' entitlement to that amount, or instead, chose to receive payment prior to transfer to the New DB Fund.

The New DB Fund will have at least 50 defined benefit members and the Company will deal with each member at arm's length.

Assumptions

The value of the superannuation interest transferred for each member is no more than would be paid to the member if they left service (resigned or retired), turned 65 or died in service.

The conditions set out in 292-170.07(3), (4), (5) and (6) and 292-170.08(3), (4), (5) and (6) of the ITAR 1997 will be met for all members.

All members' notional taxed contributions (NTCs) exceed their concessional contributions cap for the financial year.

The actuary for the New DB Fund considers that it is reasonable in the circumstances to consider the Original DB Fund as a predecessor fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 292-170

Income Tax Assessment Regulations 1997 Schedule 1A

Reasons for decision

Successor Fund Members of New DB Fund

Question 1

Summary

Members successor fund transferred to the New DB Fund will meet the conditions in subparagraph 292-70(9)(c)(i) and paragraph 292-170(9)(d) of the ITAA 1997.

Detailed reasoning

Concessional contributions for individuals with one or more DBIs

Generally an individual's concessional contributions will be as defined in section 292-25 of the ITAA 1997.

Subdivision 292-D of the ITAA 1997 modifies the meaning of concessional contributions in relation to a defined benefit interest (DBI) if, in a financial year, an individual has one or more superannuation interests that include a DBI.

For individuals with a DBI their concessional contributions are defined by section 292-165 of the ITAA 1997 as being their concessional contributions as defined by section 292-25 and their NTCs in respect of any DBI.

Notional taxed contributions

Subsection 292-170(1) of the ITAA 1997 provides that an individual's NTCs for a financial year have the meaning given by the ITAR 1997.

Under regulation 292-170.02 of the ITAR 1997, for a fund with 5 or more defined benefit members or which meets any of certain conditions set out in subregulations (3), (4), (5) or (6), the NTCs for a member's DBI are calculated using the method set out in Schedule 1A.

The condition in subregulation 292-170.02(5) of the ITAR 1997 is that the fund's defined benefit members are transferred from a fund which had 50 or more defined benefit members on 1 July 2007, the current fund's trustee is an RSE licensee and the employer-sponsor deals with each of the defined benefit members of the current fund at arm's length.

The condition in subregulation 292-170.02(6) of the ITAR 1997 is satisfied where the fund had no defined benefit members on 30 June 2007 and a person becomes a defined benefit member after that date but the fund has at least 50 defined benefit members and the employer-sponsor deals with each of the defined benefit members at arm's length.

'Grandfathering' of NTCs

Despite subsection 292-170(1) of the ITAA 1997, subsections 292-170 (6), (7), (8) and (9) act so that, despite the amount of NTCs worked out under the regulations, in certain circumstances the individual's NTCs for a DBI will be 'grandfathered' to the amount of the individual's concessional contributions cap for that financial year.

Relevantly, for financial years on or after the 2009-10 financial year, the circumstances are set out in subsection 292-170(8) of the ITAA 1997 and, for members of funds for whom a DBI was held in a different superannuation fund on 12 May 2009, in subsection 292-170(9).

Subsection 292-170(8) provides that where:

(a) Subdivision 292-D applies to a member because they have have a DBI in a financial year, and

(b) disregarding this subsection, the NTCs for the financial year in respect of the DBI exceed the member's concessional contributions cap for the financial year, and

(c) either:

(i) they held the DBI in the superannuation fund on 12 May 2009; or

(ii) all the requirements in subsection (9) are satisfied, and

(d) the conditions specified in the regulations are satisfied, and

(e) the financial year is the 2009-2010 financial year or a later financial year.

the member's NTCs will be 'grandfathered' to be equal to their concessional contributions cap for the relevant financial year.

Conditions specified in the regulations

For the purposes of paragraph 292-170(8)(d) of the ITAA 1997, the relevant regulation is 292-170.07 of the ITAR 1997. This regulation applies to a superannuation fund if a defined benefit member of the fund is a person to whom subregulation 292-170.02(2) applies, or is taken to apply, that is, if the members' NTCs are worked out under Schedule 1A.

Subregulation 292-170.07(2) of the ITAR 1997 requires that the new entrant rate for the defined benefit member (also worked out under Schedule 1A of the ITAR 1997) must not have increased since 12 May 2009 (or has increased only as a result of a change to the rules of the superannuation fund that increases a benefit as a result of a change made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992).

However, subregulation 292-170.07(7) of the ITAR 1997 provides that, if the condition in subregulation 292-170.07(2) is not satisfied only because:

(i) the defined benefit member moved to a new benefit category;

(ii) the move was caused by the necessary application of the rules of the superannuation fund that were, or of legislation that was, in force on 5 September 2006; and

(iii) the members had no control over the application of the rules or legislation,

the failure to satisfy the condition is disregarded in determining if the conditions of this regulation have been satisfied for the 2009-10 and subsequent financial years.

Requirements of subsection 292-170(9) of the ITAA 1997

Subsection 292-170(9) of the ITAA 1997 requires that

(a) the member held a defined benefit interest (the original interest ) in a superannuation fund (the original fund ) on 12 May 2009;

(b) the defined benefit interest mentioned in paragraph (8)(a) (the current interest) is in a different superannuation fund (the current fund );

(c) the entire value of the original interest:

(i) was transferred directly to the current interest after 12 May 2009; or

(ii) …

(d) the member's rights to accrue future benefits under the current interest are equivalent to their rights to accrue future benefits under the original interest;

(e) either:

(i) the notional taxed contributions mentioned in paragraph (8)(b) do not exceed what they would have been if the transfer mentioned in paragraph (c) had not taken place; or

(ii) the conditions (if any) specified in the regulations are satisfied;

(f) the conditions (if any) specified in the regulations are satisfied.

The conditions in the regulations for the purposes of subparagraph 292-170(9)(e)(ii) are set out in regulation 292-170.08 of the ITAR 1997 and are essentially identical to the conditions of regulation 292-170.07.

There are no conditions specified in the regulations in relation to paragraph 292-170(9)(f) of the ITAA 1997.

Application of law to your facts

Concessional contributions

Under the proposed restructure, members of the Original DB Fund whose entitlements are transferred to the New DB Fund will acquire a DBI in the New DB Fund. Therefore, after the restructure, the members will have a DBI and Subdivision 292-D of the ITAA 1997 will apply to them in respect of financial years ending after the restructure.

Notional taxed contributions

The New DB Fund will have 5 or more defined benefit members and will also meet the conditions in subregulations 292-170.02(5) and (6) of the ITAR 1997. Therefore subregulation 292-170.02(2) will apply and members' NTCs will be calculated in accordance with Schedule 1A.

'Grandfathering' of NTCs

The members of the New DB Fund will have a DBI and, as noted above, Subdivision 292-D of the ITAA 1997 will apply to them. The financial year will be later than the 2009-10 financial year.

It is an assumption of this advice that all members' NTCs exceed their concessional contributions cap for the financial year (as it is a condition for any of the grandfathering provisions to apply that the member's NTCs as worked out under Schedule 1A of the ITAR 1997 exceed their concessional contributions cap).

The members will not have held the DBI on 12 May 2009 and therefore grandfathering will not apply unless the conditions in subsection 292-170(9) of the ITAA 1997 are met.

Additionally, the member must meet the conditions specified in regulations 292-170.07 and 292-170.08 of the ITAR 1997.

The new entrant rate for all defined benefit members as worked out under Schedule 1A will not increase from that applying to them at 12 May 2009. Therefore the conditions set out in subregulations 292-170.07(2) and 292-170.08(2) of the ITAR 1997 are met. It is therefore not necessary to consider whether the conditions set out in subregulations 292-170.07(7) and 292-170.08(7) are met.

It is an assumption of this advice that the conditions set out in 292-170.07(3), (4), (5) and (6) and 292-170.08(3), (4), (5) and (6) of the ITAR 1997 will be met for all members.

Therefore the conditions in regulations 292-170.07 and 292-170.08 of the ITAR 1997 are met.

Subparagraph 292-170(9)(c)(i) of the ITAA 1997 requires the entire value of the original interest to be transferred directly to the current interest after 12 May 2009.

The amount to be transferred from the Old DB Fund to the New DB Fund for each of the successor members is the lump sum payable as at the date of transfer plus, where relevant, the indefeasibly accrued amount of other benefits.

The additional amounts are not payable except on resignation or death but are accrued as either event will occur at some stage even though the members will not resign or die.

Therefore, subparagraph 292-170(9)(c)(i) of the ITAA 1997 will be met for the successor fund members of the New DB Fund.

Paragraph 292-170(9)(d) of the ITAA 1997 requires that the member's rights to accrue future benefits under the current interest is equivalent to their rights to accrue future benefits under the original interest.

The benefit design for successor members will be replicated between the Old DB Fund and the New DB Fund. Therefore each successor member's rights to accrue future benefits under their current interest will be not just equivalent but identical to their rights to accrue future benefits under the original interest.

Therefore, paragraph 292-170(9)(d) of the ITAA 1997 will be met for the successor fund members of the New DB Fund.

Consent Members of New DB Fund

Question 2

Summary

Members who consent to the transfer of their superannuation interest to the New DB Fund will meet the conditions in subparagraph 292-70(9)(c)(i) and paragraph 292-170(9)(d) of the ITAA 1997.

Detailed reasoning

Concessional contributions for individuals with one or more DBIs

Generally an individual's concessional contributions will be as defined in section 292-25 of the ITAA 1997.

Subdivision 292-D of the ITAA 1997 modifies the meaning of concessional contributions in relation to a defined benefit interest (DBI) if, in a financial year, an individual has one or more superannuation interests that include a DBI.

For individuals with a DBI their concessional contributions are defined by section 292-165 of the ITAA 1997 as being their concessional contributions as defined by section 292-25 and their NTCs in respect of any DBI.

Notional taxed contributions

Subsection 292-170(1) of the ITAA 1997 provides that an individual's NTCs for a financial year have the meaning given by the ITAR 1997.

Under regulation 292-170.02 of the ITAR 1997, for a fund with 5 or more defined benefit members or which meets any of certain conditions set out in subregulations (3), (4), (5) or (6), the NTCs for a member's DBI are calculated using the method set out in Schedule 1A.

The condition in subregulation 292-170.02(5) of the ITAR 1997 is that the fund's defined benefit members are transferred from a fund which had 50 or more defined benefit members on 1 July 2007, the current fund's trustee is an RSE licensee and the employer-sponsor deals with each of the defined benefit members of the current fund at arm's length.

The condition in subregulation 292-170.02(6) of the ITAR 1997 will be satisfied where the fund had no defined benefit members on 30 June 2007 and a person becomes a defined benefit member after that date but the fund has at least 50 defined benefit members and the employer-sponsor deals with each of the defined benefit members at arm's length.

'Grandfathering' of NTCs

Despite subsection 292-170(1) of the ITAA 1997, subsections 292-170 (6), (7), (8) and (9) act so that, despite the amount of NTCs worked out under the regulations, in certain circumstances the individual's NTCs for a DBI will be 'grandfathered' to the amount of the individual's concessional contributions cap for that financial year.

Relevantly, for financial years on or after the 2009-10 financial year, the circumstances are set out in subsection 292-170(8) of the ITAA 1997 and, for members of funds for whom a DBI was held in a different superannuation fund on 12 May 2009, in subsection 292-170(9).

Subsection 292-170(8) provides that where

(a) Subdivision 292-D applies to a member because they have have a DBI in a financial year, and

(b) disregarding this subsection, the NTCs for the financial year in respect of the DBI exceed the member's concessional contributions cap for the financial year, and

(c) either:

(i) they held the DBI in the superannuation fund on 12 May 2009; or

(ii) all the requirements in subsection (9) are satisfied, and

(d) the conditions specified in the regulations are satisfied, and

(e) the financial year is the 2009-2010 financial year or a later financial year.

the member's NTCs will be 'grandfathered' to be equal to their concessional contributions cap for the relevant financial year.

Conditions specified in the regulations

For the purposes of paragraph 292-170(8)(d) of the ITAA 1997, the relevant regulation is subregulation 292-170.07 of the ITAR 1997. This regulation applies to a superannuation fund if a defined benefit member of the fund is a person to whom subregulation 292-170.02(2) applies, or is taken to apply, that is, if the members' NTCs are worked out under Schedule 1A.

Subregulation 292-170.07(2) of the ITAR 1997 requires that the new entrant rate for the defined benefit member (also worked out under Schedule 1A of the ITAR 1997) must not have increased since 12 May 2009 (or has increased only as a result of a change to the rules of the superannuation fund that increases a benefit as a result of a change made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992).

However, subregulation 292-170.07(7) of the ITAR 1997 provides that, if the condition in subregulation 292-170.07(2) is not satisfied only because:

(i) the defined benefit member moved to a new benefit category;

(ii) the move was caused by the necessary application of the rules of the superannuation fund that were, or of legislation that was, in force on 5 September 2006; and

(iii) the members had no control over the application of the rules or legislation,

the failure to satisfy the condition is disregarded in determining if the conditions of this regulation have been satisfied for the 2009-2010 and subsequent financial years.

Requirements of subsection 292-170(9) of the ITAA 1997

Subsection 292-170(9) of the ITAA 1997 requires that

(a) the member held a defined benefit interest (the original interest ) in a superannuation fund (the original fund ) on 12 May 2009;

(b) the defined benefit interest mentioned in paragraph (8)(a) (the current interest) is in a different superannuation fund (the current fund );

(c) the entire value of the original interest:

(i) was transferred directly to the current interest after 12 May 2009; or

(ii) …

(d) the member's rights to accrue future benefits under the current interest are equivalent to their rights to accrue future benefits under the original interest;

(e) either:

(i) the notional taxed contributions mentioned in paragraph (8)(b) do not exceed what they would have been if the transfer mentioned in paragraph (c) had not taken place; or

(ii) the conditions (if any) specified in the regulations are satisfied;

(f) the conditions (if any) specified in the regulations are satisfied.

The conditions in the regulations for the purposes of subparagraph 292-170(9)(e)(ii) are set out in regulation 292-170.08 of the ITAR 1997 and are essentially identical to the conditions of regulation 292-170.07.

There are no conditions specified in the regulations in relation to paragraph 292-170(9)(f) of the ITAA 1997.

Application of law to your facts

Concessional contributions

Under the proposed restructure, members of the Original DB Fund whose entitlements are transferred to the New DB Fund will acquire a DBI in the New DB Fund. Therefore, after the restructure, the members will have a DBI and Subdivision 292-D of the ITAA 1997 will apply to them in respect of financial years ending after the restructure.

Notional taxed contributions

The New DB Fund will have 5 or more defined benefit members and will also meet the conditions in subregulations 292-170.02(5) and (6) of the ITAR 1997. Therefore subregulation 292-170.02(2) will apply and members' NTCs will be calculated in accordance with Schedule 1A.

'Grandfathering' of NTCs

The members of the New DB Fund will have a DBI and, as noted above, Subdivision 292-D of the ITAA 1997 will apply to them. The financial year will be later than the 2009-10 financial year.

It is an assumption of this advice that all members' NTCs exceed their concessional contributions cap for the financial year (as it is a condition for grandfathering that a member's NTCs as worked out under Schedule 1A of the ITAR 1997 exceed their concessional contributions cap).

The members will not have held the DBI on 12 May 2009 and therefore grandfathering will not apply unless the conditions in subsection 292-170(9) of the ITAA 1997 are met.

Additionally, the member must meet the conditions specified in regulations 292-170.07 and 292-170.08 of the ITAR 1997.

The new entrant rate for all defined benefit members as worked out under Schedule 1A will not increase from that applying to them at 12 May 2009. Therefore the conditions set out in subregulations 292-170.07(2) and 292-170.08(2) of the ITAR 1997 are met. It is therefore not necessary to consider whether the conditions set out in subregulations 292-170.07(7) and 292-170.08(7) are met.

It is an assumption of this advice that the conditions set out in 292-170.07(3), (4), (5) and (6) and 292-170.08(3), (4), (5) and (6) of the ITAR 1997 will be met for all members.

Therefore the conditions in regulations 292-170.07 and 292-170.08 of the ITAR 1997 are met.

Subparagraph 292-170(9)(c)(i) of the ITAA 1997 requires the entire value of the original interest to be transferred directly to the current interest after 12 May 2009.

The consent members consist of members who consent to the transfer of their accrued benefits in the Original DB Fund to the Modern Division of the New DB Fund.

The amount to be transferred from the Old DB Fund to the New DB Fund for each of the consent members is the lump sum payable as at the date of transfer plus, where relevant, the indefeasibly accrued amount of other benefits.

The additional amounts are not payable except on resignation or death but are accrued as either event will occur at some stage even though the members will not resign or die.

Therefore, subparagraph 292-170(9)(c)(i) of the ITAA 1997 will be met for the successor fund members of the New DB Fund.

Paragraph 292-170(9)(d) of the ITAA 1997 requires that the member's rights to accrue future benefits under the current interest is equivalent to their rights to accrue future benefits under the original interest.

The benefit design for consent members will not be replicated between the Old DB Fund and the New DB Fund.

However, the members' rights to accrue future benefits in the New DB Fund are actuarially equivalent to their rights to accrue future benefits in the Old DB Fund, that is, in aggregate. Additionally, the Company contribution rate and the new entrant rates remain the same.

The Commissioner considers that where there is actuarial equivalency of the benefits accrued, and the Company contribution rate and the new entrant rates remain the same between the original interest and the current interest in the Original DB Fund and the New DB Fund the condition in paragraph 292-170(9)(d) of the ITAA 1997 is met.

Question 3

Determination of new entrant age for New DB Fund

Summary

If the New DB Fund's actuary concludes that it is reasonable in the circumstances to regard the Original DB Fund as a predecessor fund the average age of entry used in the Original DB Fund for transferring members may be taken into account when calculating the new entrant rate of the new DB Fund.

Detailed reasoning

Subclause 2.1(1) of Schedule 1A of the ITAR 1997 provides that the new entrant rate of a benefit category is the rate calculated under Part 2 and using the assumptions set out in Part 3.

Subclause 3.6(1) of Schedule 1A of the ITAR 1997 provides that, in working out the new entrant rate, the age of new entrants to be assumed is based on the average age of entry to the fund of the persons who were defined benefit members of the fund at 1 July 2007.

Subclause 3.6(2A) of Schedule 1A of the ITAR 1997 states

If:

(a) there has been a transfer of defined benefit members from a predecessor fund into the fund or a sub-fund of the fund; and

(b) the actuary considers it reasonable to do so;

the actuary may determine a new entrant rate for the fund or sub-fund taking account of the average age of entry used for or relevant for those members in the predecessor fund.

The Explanatory Statement to the Income Tax Assessment Amendment Regulations 2009 (No. 3) states:

Item 8 amends the provisions which determine how the new entrant age for a member is calculated. The new entrant age is used by an actuary in their calculations for determining the level of notional taxed contributions for a member.

The amendment is intended to facilitate fund mergers and transfers by allowing the actuary of the successor fund to take into account the average age of entry of members to a predecessor fund, where appropriate. The change is necessary as Items 3.6(1) and 3.6(2A) of Schedule 1A do not currently facilitate mergers or transfers made after 1 July 2007.

The amendment provides that if there has been a transfer of members from a predecessor fund into a fund or sub-fund then the actuary can, if they consider it reasonable to do so, determine a new entrant age for that fund or sub-fund that takes into account the average age of entry used for or relevant for those transferred members in the predecessor fund.

For example, where members of a predecessor fund are transferred to a new fund or new sub-fund, the actuary of the new fund will be able to determine the average age of entry for the purposes of Schedule 1A taking into account the average age of entry used for those members in the predecessor fund, or the average age of entry into the predecessor fund of the transferred members.

Where the transfer is being made into an existing fund (or sub-fund) where a new entrant age has already been determined, then the actuary can choose, if they consider it appropriate, to recalculate the existing new entrant age to take account of the relevant average entrant age in the predecessor fund of the transferred members.

These amendments will apply in relation to the 2009-10 financial year and later financial years.

The excess contributions tax scheme is not intended to limit transfers and mergers only to successor funds. In particular the successor fund definition contained in subregulation 1.03(1) of the SISR refers to a fund from where the benefits of a member are transferred from as 'the original fund' and not a predecessor fund.

Predecessor fund is not defined in the ITAR 1997 and therefore takes its ordinary meaning. The Macquarie Dictionary (online version 5.00) defines predecessor as:

1. [not relevant]

2. anything succeeded or replaced by something else.

…..

Therefore in a situation where a member's benefits are transferred from one fund to another, either immediately or through a number of transfers, the original fund would be considered a predecessor fund.

It is a matter for the professional judgment of the actuary as to whether it is reasonable for them to determine a new entrant rate for a fund or sub-fund by taking account of the average age of entry used for, or relevant for those members in the predecessor fund.

Other relevant comments

It is not necessary that all members' NTCs exceed their concessional contributions cap for the financial year for the answers given above to apply to any members whose NTCs do exceed their concessional contributions cap. The assumptions in our advice in respect of this requirement are made as subsection 292-170(8) of the ITAA 1997 is only enlivened if a relevant member's NTCs do exceed their concessional contributions cap for that financial year.

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