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Edited version of private advice

Authorisation Number: 1012678078378

Ruling

Subject: Composition of superannuation benefits.

Question

Does your superannuation interest contain a tax-free component?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2014.

The scheme commenced on:

1 July 2013.

Relevant facts and circumstances

You are a member of a self-managed superannuation Fund (the Fund).

You commenced a pension during the 1996-97 income year.

You are over 60 years of age.

Upon commencement you provided the following details to the ATO detailing the relevant values as at commencement date:

Based on the above, the undeducted purchase price (UPP) of your pension at commencement date was $X (undeducted contributions plus the pre-1 July 1983 component).

According to the member's statement for the year ended 30 June 2007, the balance of your superannuation interest was $Y.

Your applicable service period as at 30 June 2007 was calculated to be:

Based on the information provided in your income tax returns, you claimed deductions for the deductible amount of the UPP for your pension for the 1996-97 to 2006-07 income years totaling $F.

You have stated that you have not made any further contributions to the fund since commencing a pension.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 27A(1).

Income Tax Assessment Act 1997 Section 280-35.

Income Tax Assessment Act 1997 Section 301-15.

Income Tax Assessment Act 1997 Section 301-20.

Income Tax Assessment Act 1997 Subsection 301-20(1).

Income Tax Assessment Act 1997 Subsection 301-20(2).

Income Tax Assessment Act 1997 Subsection 301-20(4).

Income Tax Assessment Act 1997 Section 301-30.

Income Tax Assessment Act 1997 Subsection 301-35(1).

Income Tax Assessment Act 1997 Subsection 301-35(2).

Income Tax Assessment Act 1997 Section 306-5.

Income Tax Assessment Act 1997 Section 307-5.

Income Tax Assessment Act 1997 Section 307-120.

Income Tax Assessment Act 1997 Subsection 307-125(2).

Income Tax Assessment Act 1997 Section 307-210.

Income Tax Assessment Act 1997 Section 307-225.

Income Tax Assessment Act 1997 Section 307-345.

Income Tax Assessment Act 1997 Subsection 307-345(2).

Reasons for decision

Summary

The tax-free component of your superannuation interest as at 30 June 2007 was $E. When taken as a proportion of your total superannuation interest of Y at 30 June 2007, the tax-free component represents E%.

As you were in receipt of a pension at 30 June 2007, the tax-free and taxable component proportions are fixed from that date.

Detailed reasoning

Components of a superannuation interest

A superannuation interest is made up of two components: a tax-free component and a taxable component. Subdivision 307-D of the Income Tax Assessment Act 1997 (ITAA 1997) defines the various components of a superannuation interest.

Tax-free component

Section 307-210 of the ITAA 1997 states that the tax-free component consists of the contributions segment and the crystallised segment.

The contributions segment consists of all contributions made after 30 June 2007 which have not been included in the assessable income of the superannuation fund.

According to the facts you had commenced a pension during the 1996-97 income year and did not make any contributions to the fund after that date. As such, your superannuation interest does not include a contributions segment.

The crystallised segment of a superannuation interest is defined in section 307-225 of the ITAA 1997 as follows:

Based on the above, the first step requires the fund to assume that an eligible termination payment (ETP) was made to you just before 1 July 2007 equal to the value of the superannuation interest at that time. According to the facts the value of your superannuation interest as at 30 June 2007 was $Y. As such, this represents the notional ETP. Based on the facts provided, this amount consists of an undeducted contributions component and a pre-July 1983 component.

Calculating the undeducted contributions component

The term 'undeducted contributions' is defined in subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Essentially undeducted contributions are contributions made to the superannuation fund, apart from employer contributions, for which no deduction has been claimed.

In order to calculate the undeducted contributions component, we need to work backwards using the value of the undeducted purchase price (UPP) at the commencement date of your pension. According to the facts, the UPP of your superannuation interest at that time was $X.

As you were in receipt of a pension at 30 June 2007, this figure is reduced by the deductions of $F claimed against the UPP from the commencement of your pension in the 1996-97 income year until the 'payment' of the notional ETP in the 2006-07 income year. This provides a residual UPP of $G ($X minus $F). Note however that the UPP is made up of the undeducted contributions component and the pre-July 83 component. As such the residual needs to be apportioned between the two components based on their relevant proportions at pension commencement date.

At pension commencement date, undeducted contributions represented H% ($A divided by $X) of the UPP. Accordingly, H% of the residual will represent the undeducted contributions component as at 30 June 2007. This provides a residual undeducted contributions component of $I (H% multiplied by $G).

Calculating the pre-July 83 component

The amount of the pre-July 1983 component is the lesser amount determined by the formulae set out in subparagraphs 27AA(1)(d)(i) and (ii) of the ITAA 1936, these being:

C is the concessional component amount ($nil);

IC is the post-June 1984 invalidity component ($nil);

NQ is any non-qualifying component amount ($nil);

EC is the excessive component amount ($nil);

CGT is the CGT exempt component amount ($nil);

UC is the undeducted contributions ($I);

  ($Y - $nil - $nil - $nil - $nil -$nil) x (AB / ABC)

Based on the above analysis, the crystallised component of your superannuation interest is $L (undeducted contributions component plus the pre-July 1983 component). As you do not have a contributions component this amount represents your total tax-free component. Therefore as at 30 June 2007 the proportion of your total superannuation interest that represented the tax-free component was E% ($L divided by $Y).

Taxable component

The taxable component of your superannuation interest is the total value of the interest at 30 June 2007, less the value of the tax-free amount. As such, your taxable component is $M ($Y minus $L). Therefore the proportion of your total superannuation interest that represents the taxable component is N% ($M divided by $Y).

The taxable component of a superannuation interest can consist of an element taxed in the fund and/or an element untaxed in the fund. In your case, the taxable component consists wholly of a post-30 June 1983 taxed element.

Further issues for you to consider

The tax-free and taxable component proportions detailed above are calculated as at 30 June 2007. As you were in receipt of a pension at 30 June 2007, the proportions are fixed from this date. Any earnings (or losses) accumulated in the superannuation fund are allocated to the tax-free and taxable components based on the proportions calculated above.

As you are over 60 years of age, the tax-free and taxable component proportions are irrelevant as your entire pension is non-assessable and non-exempt income, that is, tax-free. However, where death benefits are distributed to non-dependant beneficiaries, only the tax free portion (E%) of the superannuation benefits will be tax-free in the hands of the beneficiaries. The remainder, being the taxed element of the taxable component (N%), will be subject to tax in the hands of the non-dependant beneficiaries at 15%.

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