Edited version of administratively binding advice

Authorisation Number: 1012471618369

Advice

Subject: Concessional contributions

Questions

1. Is the amount remaining at the end of a term certain pension considered concessional contributions if the Fund Trustees allocate the amount from the Fund Reserve Account to a member account?

2. Is the amount considered concessional contributions if the Fund Trustees allocate the amount from the Fund Reserve Account to a member account to commence a new pension for the member?

Answer

1. Yes.

2. Yes.

This advice applies for the following period:

Year ending 30 June 2013.

The scheme commences on

1 July 2012

Relevant facts and circumstances

The superannuation fund (the Fund) is a complying ATO Regulated Self-Managed Superannuation Fund (SMSF).

The Fund has four trustees (the Fund Trustees) who are also members of the Fund, Member 1, Member 2, Member 3 and Member 4.

The Fund commenced payment of a term certain complying market linked pension (TCC MLP) some years ago to Member 1, with the last payment made during 2013 at the end of the set term.

The TCC MLP was paid under the Fund Trust Deed which was designed to comply with section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA) and regulation 1.06 of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

The TCC MLP was not a defined benefit pension and did not have a residual capital value. No actuarial advice regarding the calculation of the amount of pension income was received at the time the TCC MLP commenced. However, based on the relevant documentation provided, it can be noted the calculation of the income stream was to be based upon a per annum earning rate. Once an earning rate was nominated, the income stream was then calculated by an actuary and advised to the client when the relevant pension commenced.

Member 2 is currently receiving an Account Based Pension (ABP) with a similar commencement date.

At all times, the Fund assets were segregated to support the respective pension accounts for Member 1's TCC MLP and Member 2's ABP.

When the final pension payment was made at the end of the pension term, the balance remaining in the TCC MLP Pension Account was an amount (the amount) consisting of market-linked assets and some cash, all of which were previously supporting the TCC MLP pension payments.

The amount was automatically transferred to a reserve account within the Fund (Fund Reserve Account) by the Fund administrator.

The Fund Trustees have not yet allocated the amount from the Fund Reserve Account to any member(s), pending the outcome of the administratively binding advice.

Copies of relevant documentation provided to Member 1 in respect of the TCC MLP included the following details:

· No indexation rate

· Date of first payment:

· Payment frequency: Monthly

· Commencement date

· Beneficiaries : None nominated

· Total Purchase Price

· Term of Pension

Member accounts were also set up for Member 3 and Member 4 and the balance in those accounts have been $0.

No reserve account was maintained in addition to the TCC MLP (segregated) Pension Account as per the Fund Rules.

The TCC MLP was only funded from its own single pension account and the amount transferred to the Fund Reserve has arisen due to the segregated assets of the TCC MLP performing very well (and better than expected) over the term of the pension.

Relevant legislative provisions

Taxation Administration Act 1953 Division 359

Income Tax Assessment Act 1997 Section 292-15

Income Tax Assessment Act 1997 Section 292-20

Income Tax Assessment Act 1997 Section 292-25

Income Tax Assessment Act 1997 Subsection 292-25(3)

Income Tax Assessment Regulations 1997 Paragraph 292-25.01(4)(a)

Income Tax Assessment Regulations 1997 Subparagraph 292-25.01(4)(b)(i)

Income Tax Assessment Regulations 1997 Subparagraph 292-25.01(b)(b)(ii)

Income Tax Assessment Regulations 1997 Sub-Subparagraph 292-25.01(4)(b)(ii)(B)

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Superannuation Industry (Supervision) Regulations Subregulation 1.06(8)

Reasons for decision

Summary

The amount remaining at the end of the pension term when allocated by the Fund Trustees from the Fund Reserve Account to a member account forms part of their concessional contributions for the purposes of excess contributions tax in the year it is allocated.

The amount allocated from the Fund Reserve Account to a member account to commence a new pension for a member also forms part of their concessional contributions for the purposes of excess contributions tax in the year it is allocated.

Detailed reasoning

Concessional contributions

Subsection 292-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 292-25(2) of the ITAA 1997 and each amount covered under subsection 292-25(3) of the ITAA 1997.

Subsection 292-25(3) of the ITAA 1997 includes in a person's concessional contributions for a financial year an amount in a complying superannuation plan that is allocated for the person for the year in accordance with the conditions specified in the regulations. The relevant regulation is regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

Subregulation 292-25.01(4) provides that an amount allocated from a reserve is treated as being allocated in a way covered by subsection 292-25(3) of the ITAA 1997 unless an exclusion in subregulation 292-25.01(4) of the ITAR 1997 applies.

Paragraph 292-25.01(4)(a) of the ITAR 1997 excludes an amount that is allocated from a reserve if:

(i) the amount is allocated, in a fair and reasonable manner:

(A) to an account for every member of the complying superannuation plan; or

(B) if the member is a member of a class of members of the complying superannuation plan, and the amount in the reserve relates only to that class of members - to an account for every member of the class; and

(ii) the amount that is allocated for the financial year is less than 5% of the value of the member's interest in the complying superannuation plan at the time of allocation; or …

Paragraph 292-25.01(4)(b) of the ITAR 1997 excludes an amount that is allocated from a reserve if:

(i) the amount is allocated from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities (contingent or not) as soon as they become due, in respect of superannuation income stream benefits that are payable by the fund at that time; and

(ii) any of the following applies:

(A) the amount has been allocated to satisfy a pension liability of the plan paid during the financial year;

(B) on the commutation of the income stream, except as a result of the death of the primary beneficiary, the amount is allocated to the recipient of the income stream, to commence another income stream, as soon as practicable;

(C) on the commutation of the income stream as a result of the death of the primary beneficiary, the amount:

(I) is allocated to a death benefits dependant to discharge liabilities in respect of a superannuation income stream benefit that is payable by the plan as a result of the death; or

(II) if sub-sub paragraph (I) does not apply - is paid as a superannuation lump sum and as a superannuation death benefit;as soon as practicable.

Meaning of 'reserve'

There is no definition of 'reserve' in the ITAA 1997 or the ITAR 1997.

The Commissioner's view is that 'reserve' as used in regulation 292-25.01 of the ITAR 1997 has a broad meaning and includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event.

Use of the reserve

If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of paragraph 292-25.01(4)(b) of the ITAR 1997, subparagraph 292-25.01(4)(b)(i) of the ITAR 1997 requires the reserve to be 'used solely for the purpose of enabling the fund to discharge all or part of its liabilities ... in respect of superannuation income stream benefits that are payable by the fund at that time'.

Applying the law to your circumstances

From the information provided, the TCC MLP is a market linked pension provided under the rules of the Fund Trust Deed that meets the standards under subregulation 1.06(8) of the SISR and paragraph 1.06(8)(c) requires that the pension does not have a residual capital value.

In the present case, under the terms of the TCC MLP, the member agreed to receive a gross annual pension amount for the set term with no residual capital value.

The amount transferred into the Fund Reserve Account results from the amount remaining after the last payment of the TCC MLP was made at the end of its term.

The amount has resulted due to the better than expected performance of the segregated assets which supported the pension over the term of the pension.

When a pension term ends, any amount remaining is no longer connected to an income stream and cannot be considered to be benefits of the member whose pension has ceased.

The amount held in the Fund Reserve Account is not attributable to a specific member, rather it is money that the Fund has set aside to ensure that it can meet specific financial obligations for which the reserve was established.

It is evident the Fund Trust Deed permits the Fund Trustees to set up a reserve account for amounts no longer required to pay benefits for members.

The Fund Trust Deed also permits use of the amounts held in the reserve account to provide additional benefits to members.

As such, the amount in the Fund Reserve Account is not an amount belonging to any particular fund member and is also not an amount supporting superannuation income stream liabilities that are payable by the Fund.

Therefore, the Fund Reserve Account is not used solely for the purpose of enabling the Fund to discharge its liability in respect of superannuation income stream benefits that are payable by the Fund at that time.

Accordingly, where the Fund Trustees allocate the amount standing to the credit of the Fund Reserve Account to a member account or to a member account to commence a new complying pension for a member, the amount so allocated will not meet the exception in paragraph 292-25.01(4)(b) of the ITAR 1997.

The amount in the Fund Reserve Account is not supporting current superannuation income stream benefits as required by the exception.

Accordingly, the amount is not excluded from being a concessional contribution when so allocated by the Fund Trustees.

Hence, this exclusion does not apply to exclude the allocated amount as concessional contributions as required by the relevant provisions in the ITAA 1997 and ITAR 1997.

Concessional contributions caps and liability to tax

A person will have a liability to excess concessional contributions tax imposed by the Superannuation (Excess Concessional Contributions Tax ) Act 2007 if they have excess concessional contributions over the concessional contributions cap for a financial year (sections 292-15 and 292-20 of the ITAA 1997).

According to section 292-5 of the ITAA 1997, the object of Division 292 (concerning excess contributions tax) is to ensure the amount of concessionally taxed superannuation benefits a person receives results from contributions made gradually over the course of the person's life. Unless specifically excluded, contributions made by or in respect of an individual are intended to be counted as a contribution.

As stated earlier, the Commissioner's view is that 'reserve' as used in regulation 292-25.01 of the ITAR 1997 should be given a broad meaning to maintain the integrity of the contributions caps.

A person's concessional contributions for a financial year is subject to the limits of the concessional contributions cap for the financial year. The concessional contributions cap for the 2012-13 financial year is $25,000. This amount is not indexed.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).