Edited version of administratively binding advice

Authorisation Number: 1012563038424

Advice

Subject: Concessional contributions

Questions

1. Will an allocation from a reserve to members' accounts be a contribution?

2. Will an allocation from a reserve to members' accounts be a concessional contribution?

3. Will the allocation from a reserve not in excess of the concessional contribution cap for the 2013-14 income year subject to the excess contributions tax?

Answers

1. No.

2. Yes.

3. No.

This advice applies for the following period

Year ending 30 June 2014

The arrangement commenced on

1 July 2013

Relevant facts and circumstances

1. The Fund is a complying self-managed superannuation fund.

2. The members of the Fund are Member A and Member B. Both members are directors of a private company which is the corporate trustee of the Fund (the Fund Trustee).

3. The trustee of the Fund advised that both Members are over 65 years of age and do not meet the work test. Therefore they are not eligible to make further contributions to the Fund.

4. Member A has a market linked pension and a small accumulation account.

5. Member B is receiving a lifetime pension from the Fund under subregulation 1.06(2) of the Superannuation Industry (Supervision) Regulations 1994.

6. The annual pensions have excess reserves of a specific amount (assets over and above the amount necessary to meet the pension requirements). The Trustee advised that the reserve exists solely to support the annual pensions.

7. The Fund Trustee intends to allocate some of the reserves to both Members by a non-assessable 5% increase in the crediting rate.

8. The Fund Trustee also intends to allocate an amount from the reserves within the concessional contribution limit to each Member to their individual accumulation account in the 2013-14 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 292-25(1)

Income Tax Assessment Act 1997 Subsection 292-25(2)

Income Tax Assessment Act 199 Subsection 292-25(3)

Income Tax Assessment Regulations 1997 Regulation 292-25.01

Income Tax Assessment Regulations 1997 Subregulation 292-25.01(4)

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

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

Income Tax Assessment Act 1997 Subsection 291-15

Income Tax Assessment Act 1997 Subsection 291-20

Income Tax Assessment Act 1997 Subsection 291-20(2)

Income Tax Assessment Act 1997 Subsection 291-25(2)

Income Tax Assessment Act 1997 Subsection 291-25(3)

Income Tax (Transitional Provisions) Act 1997 Subsection 291-20(1)

Reasons for decision

Summary

9. The transfer of excess reserve in the existing fund's account to an accumulation account will not be a contribution for superannuation purposes because it does not increase the capital of the fund.

10. However, if the Trustee of the Fund allocates an amount from a reserve to a member of the Fund it will form part of that member's concessional contributions for the purposes of excess contributions tax in the income year that it is allocated.

11. The member may be liable for excess contributions tax unless the transfer amount is within the concessional contributions cap.

Detailed reasoning

Ordinary meaning of contribution

12. Taxation Ruling TR 2010/1 titled 'Income Tax: superannuation contributions' states at paragraph 4:

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.

13. TR 2010/1 also states at paragraph 163:

The payment of a superannuation benefit from one superannuation interest of a member in a superannuation plan to another interest of that member in the same plan does not increase the capital of the fund.

14. The reserve to facilitate a complying lifetime pension (superannuation benefit) is the member's superannuation interest in that plan. The transfer of excess reserve (also a superannuation interest) from a complying lifetime pension (superannuation plan) to an accumulation account within the same fund (same superannuation plan) will therefore not increase the capital of the superannuation fund. Accordingly, the transfer from a reserve to an accumulation account will not be a contribution for superannuation purposes.

Concessional contributions

15. Concessional contributions are contributions made in the income year to a complying superannuation fund by or for an individual that are included in the assessable income of the superannuation provider.

Excess Contribution Tax (ECT) implications prior to 30 June 2013

16. For the purposes of ECT, concessional contributions are defined in section 292-25 of the Income Tax Assessment Act 1997 (ITAA 1997). Generally, the concessional contributions of an individual are those contributions that are paid to a superannuation fund for the benefit of that individual; and included in the fund's assessable income subsection 292-25(2)). Concessional contributions also include certain amounts allocated by a trustee for the individual in accordance with conditions specified in regulations subsection 292-25(3)).

17. Regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) applies to determine whether an amount allocated by the trustee for the individual is a concessional contribution for the purposes of subsection 292-25(3) of the ITAA 1997.

Reserve allocations as concessional contributions

18. Subregulation 292-25.01(4) of the ITAR 1997 applies prior to 1 July 2012 to determine whether an amount is made a concessional contribution for the purposes of subsection 292-25(3) of the ITAA 1997. Subject to the exceptions, the subregulation treats an amount allocated from a reserve as a concessional contribution.

19. One of the exceptions that should be considered on the current facts of this case is paragraph 292-25.01(4)(b) of the ITAR 1997. Subparagraph (i) of that provision states that an amount allocated from a reserve will not fall under subsection 292-25(3) of the ITAA 1997 if:

the amount is allocated from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities as soon as they become due, in respect of superannuation income stream benefits that are payable by the fund at that time;...

Meaning of 'reserve'

20. The ITAR 1997 do not define the term 'reserve'. Nor is the term 'reserve' defined in the ITAA 1997.

21. The Commissioner's view is that the term 'reserve', as used in regulation 292-25.01 of the ITAR 1997 should be given a broad meaning to maintain the integrity of the contribution caps.

22. For the purposes of Division 292 of the ITAA 1997 'reserve' 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. Intrinsic to the concept of a reserve is the idea that amounts held in a reserve are not allocated to a specific member account.

What is the reserve in this case?

23. It is the Commissioner's view that when a self managed superannuation fund pays a lifetime pension, the member must be treated as having forgone the amount taken from their accumulation interest in exchange for the right to receive the particular pension (in this case the annual pension for each Member of the Fund). The balance of the amount 'foregone' to facilitate the payment of the annual pension was recorded in the pension reserve account.

24. 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) 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'.

25. The Trustee advised that the reserve exists solely to support the annual pensions. In this instance, it is considered the exception under subparagraph 292-25.01(4)(b)(i) of the ITAR 1997 will be met.

26. The Trustee proposes to transfer some of the excess reserves to each Member in the 2013-14 financial year. The former provision 292-25 of the ITAA 1997 has been repealed with effect from 1 July 2013, and as the transfer will be allocated in the 2013-14 financial year therefore the former provision is no longer applicable.

Excess Contribution Tax (ECT) implications on or after 30 June 2013

27. The meaning of the concessional contributions for the 2013-14 income year and later financial years is set out in Division 291 of the ITAA 1997 under the relevant savings provision (Tax Laws Amendment (Fairer Taxation of Excess Concessional contributions) Act 2013). The new provisions replicate that of former section 292-25 under the former excess concessional contribution tax regime.

28. The concessional contributions limit for the 2013-14 financial year is as follows:

29. The new subsection 291-25(3) of the ITAA 1997 includes in the definition of concessional contributions an amount allocated by the fund provider in a member's plan provided the conditions in the regulations are met. Currently, there are no regulations for Division 291 and therefore the Commissioner of Taxation is unable to give any advice until it has completed its passage through the parliamentary process and become law.

30. Please note that if the Trustees of the Fund wish to act before the regulations are in place they will be doing so at their own risk.

Will the allocation from a reserve not in excess of the concessional contribution cap for the 2013-14 income year be subject to the excess contributions tax?

31. Concessional contributions are now defined under subsections 291-25(2) and 291-25(3) of ITAA 1997. The transfer of an excess reserve does not satisfy the provisions of subsection 291-25(2) as it is not a contribution for the purpose of superannuation i.e. does not increase the capital of the fund.

32. Subsection 291-25(3) of ITAA 1997 includes an amount in a complying superannuation plan that is allocated by the superannuation provider in relation to the plan for the member for the year in accordance with conditions specified in the regulations. As previously mentioned, there are currently no regulations in place for section 291-25. Therefore, in the absence of the regulations, transfer (or allocation) of excess reserve from a complying lifetime pension to an accumulation account will not be classified as concessional contribution.

33. However, once the regulations are in place this interpretation may be dealt with differently and the consequences might change.

34. It should be noted that, if the transfer of an excess reserve was a concessional contribution, the following ECT implications would be applicable:

Ÿ Concessional contributions cap would continue to apply to each member. If the concessional contributions for a financial year for a member exceed an amount of concessional contributions cap applicable to them, they will have excess concessional contributions for that financial year.

Ÿ Concessional contributions cap is defined in subsection 291-20(2) of the ITAA 1997. However, there are transitional rules for older Australians as outlined in section 291-20 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997). Subsection 291-20(1) of ITTPA 1997 states:

Despite section 291-20 of the ITAA 1997, your concessional contributions cap is $35,000:

(a) for the 2013-14 financial year - if you are 59 years or over on 30 June 2013; or

(b) for the 2014-15 financial year or a later financial year - if you are 49 years or over on the last day of the previous financial year.

35. Therefore, a person who is over the age of 65 for the 2013-14 financial year will have a concessional contributions cap of $35,000 for the financial year of 2013-14 applicable to them.

37. In this case, the Trustee of the Fund intends to transfer excess reserve within the concessional contributions cap to an accumulation account for each Member. As both of the Members are over the age of 65 for the 2013-14 financial year will have a concessional contributions cap of $35,000 for the financial year applicable to them. Provided the proposed transfer amount from a reserve is within the concessional contributions cap then each Member will not be liable for the excess contributions tax.

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