Edited version of your written advice

Authorisation Number: 1012716249195

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Can you claim a deduction in respect of personal superannuation contributions made to a complying superannuation fund in the 2013-14 income year if the superannuation provider has commenced a superannuation income stream based in whole or in part on the personal contributions?

Answer

No.

This ruling applies for the following period:

The year ended 30 June 2014.

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You have superannuation funds in a complying superannuation fund (the Fund).

You made several personal superannuation contributions into your accumulation account (Account  A) in the Fund in the 2013-14 income year.

In the 2014-15 income year, you transferred funds from Account A to establish a second account (Account B) with the Fund. A portion of your personal superannuation contributions for the 2013-14 income year was transferred.

Account B provides you with regular income payments and allows lump sum withdrawals. You have elected to receive regular annual income payments.

You provided an account statement for Account B which shows the balance of Account B and how the funds are invested. The statement states that you are scheduled to receive your first annual payment from Account B at a later time in the 2014-15 income year.

After establishing Account B, but before you were scheduled to receive your first payment, you provided to the trustee of the Fund a notice of intent to claim a deduction for your personal superannuation contributions made in the 2013-14 income year.

After receiving the notice, the Fund provided a letter which advised that the transfer from Account A to Account B had left insufficient funds in Account A to process the total amount of your contributions as a deduction. The Fund advised that only a portion of the total contributions would be treated as a tax deductible item.

You then lodged your tax return for the 2013-14 income year and claimed a deduction for a portion of your personal superannuation contributions.

Soon after, the Fund provided a subsequent letter which advised that in fact no amount of the contributions could be claimed as a deduction because of the transfer of all or part of your contributions to Account B.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 290-150

Income Tax Assessment Act 1997 section 290-155

Income Tax Assessment Act 1997 section 290-160

Income Tax Assessment Act 1997 section 290-165

Income Tax Assessment Act 1997 section 290-170

Income Tax Assessment Act 1997 subsection 290-170(2)

Income Tax Assessment Act 1997 subparagraph 290-170(2)(c)(iii)

Income Tax Assessment Act 1997 subsection 307-125(1)

Income Tax Assessment Act 1997 paragraph 307-125(3)(a)

Income Tax Assessment Act 1997 paragraph 307-125(3)(b)

Superannuation Industry (Supervision) Regulations 1994 regulation 1.06

Superannuation Industry (Supervision) Regulations 1994 subregulation 1.06(1)

Superannuation Industry (Supervision) Regulations 1994 regulation 1.07D

Superannuation Industry (Supervision) Regulations 1994 schedule 7

Superannuation Industry (Supervision) Regulations 1994 clause 3 of schedule 7

Reasons for decision

Summary

Your notice of intent to deduct in relation to the 2013-14 income year is not valid because the Fund has commenced a superannuation income stream based in whole or in part on the personal contributions covered by the notice.

Therefore, you are not entitled to claim a deduction for the personal superannuation contributions made to the Fund in the 2013-14 income year.

Detailed reasoning

Personal deductible superannuation contributions

A person can claim a deduction for personal contributions made to a superannuation fund for the purpose of providing superannuation benefits for themselves under section 290-150 of the Income Tax Assessment Act 1997 (ITAA 1997). However, the conditions in sections 290-155, 290-160, 290-165 and 290-170 of the ITAA 1997 must also be satisfied for the person to claim the deduction.

In this case, particular consideration is required in relation to section 290-170 of the ITAA 1997 regarding the notice of intent to deduct conditions.

Notice of intent to deduct conditions

According to section 290-170 of the ITAA 1997, you are required to provide to the trustee of the Fund a valid notice, in the approved form, of your intention to claim a deduction in respect of the contributions. The notice must be given by the earlier of the date you lodge your income tax return or the end of the income year following the year in which the contribution was made. You must also have been given an acknowledgment of receipt of the notice by the trustee of the Fund.

A notice of intent to deduct will not be valid if one or more of the following conditions in subsection 290-170(2) of the ITAA 1997 are satisfied:

the notice is not in respect of the contribution;

(b) the notice includes all or part of an amount covered by a previous notice;

(c) when you gave the notice:

(i) you were not a member of the fund or the holder of the RSA; or

(ii) the trustee or RSA provider no longer holds the contribution; or

(iii) the trustee or RSA provider has begun to pay a superannuation income stream based in whole or part on the contribution;

(d) before you gave the notice:

(i) you had made a contributions splitting application... in relation to the contribution; and

(ii) the trustee or RSA provider had not rejected the application.

Superannuation income stream

Of particular note is subparagraph 290-170(2)(c)(iii) of the ITAA 1997, which provides that a notice is not valid if the trustee has begun to pay a superannuation income stream based in whole or in part on the contribution.

The operation of this subparagraph is discussed in Taxation Ruling TR 2010/1 (TR 2010/1) entitled 'Income Tax: superannuation contributions'. Relevantly, paragraphs 272 to 274 state that:

272. It is the Commissioner's view that any superannuation benefit paid from a superannuation interest may affect the validity of a notice of intention to deduct a contribution. In particular, the Commissioner takes the view that any superannuation income stream commenced from a superannuation interest is based 'in whole or in part on' a contribution made to that superannuation interest. This is so regardless of whether the value of the superannuation income stream is less than the value of the interest as reduced by the relevant year's contributions. Further, any superannuation lump sum paid from the interest reduces the contributions held by the superannuation provider.

273. This approach is taken because it is consistent with the integrity of the rules that determine how superannuation benefits are taxed. Subsection 307-125(1) states that the tax free and taxable components of a superannuation benefit are worked out by first determining the proportions of the value of the superannuation interest that the components represent and then applying those proportions to the benefit. Paragraph 307-125(3)(a) states that, in the case of a superannuation income stream, the value of the superannuation interest and the amount of each of its components is worked out when the income stream commences. Paragraph 307-125(3)(b) states that, in the case of a superannuation lump sum, the value of the superannuation interest and the amount of each of its components is worked out just before the benefit is paid.

274. Therefore, a deduction notice covering all of the contributions made in a particular year will be invalid if it is given by a member after any superannuation benefit has been paid to the member because the components of the benefit will have been worked out on the basis that the current year's contribution was not deductible.

The effect of the Commissioner's view outlined above is that the trustee of the fund will have begun to pay a superannuation income stream based in whole or in part on the contribution once a superannuation income stream has commenced. Therefore, if you provide a notice of intent to deduct after a superannuation income stream has commenced, that notice would not be a valid notice. This is because the value of the superannuation interest and each of its components would have already been worked out on the commencement day of the income stream on the basis that the current year's contributions were not deductible.

Relevantly, there is an example in TR 2010/1 which describes a situation where a notice of intent to deduct is given to a superannuation fund after a pension partially funded by the contribution was commenced. Paragraphs 100 to 102 of TR 2010/1 state:

100. Libby has a superannuation interest valued at $150,000. Libby makes a $50,000 personal contribution in March 2008 so that her interest is valued at $200,000.

101. If, before lodging a section 290-170 notice, she were to commence a pension using $180,000 of her $200,000 interest, her fund will have commenced to pay a superannuation income stream based in whole or part on the contribution. A notice Libby purports to give her fund to deduct the contribution will be invalid.

102. Further, the outcome will be same even if, after making her personal contribution, Libby were to commence a pension of only $140,000 leaving the value of her interest in excess of the amount she intended to deduct.

When a superannuation income stream commences

In your case, you made several personal superannuation contributions into Account A in the Fund in the 2013-14 income year.

During the 2014-15 income year, you transferred funds from Account A to establish Account B from which you would receive regular annual income payments. You have thus far not received any payments from Account B as the first payment is not scheduled to occur until later in the income year.

The notice of intent to deduct was provided to the trustee of the Fund after Account B was established but prior to the receipt of your first payment. The validity of this notice thus depends on when a superannuation income stream commences.

Taxation Ruling 2013/5 (TR 2013/5) entitled 'Income Tax: when a superannuation income stream commences and ceases' provides some insight in relation to when an income stream commences by examining the Superannuation Industry (Supervision) Regulations 1994 (SISR 1994). Relevantly, paragraphs 73 to 74 state that:

73. There is no definition of 'commence' or 'commenced' or 'commencement day' as the terms relate to superannuation income streams in either the ITAA 1997 or the ITAR 1997. However, the term 'commencement day' is defined in the SISR 1994 in relation to a pension or annuity. The 'commencement day' for a pension or annuity is the first day of the period to which the first payment of the pension or annuity relates. (emphasis added)

74. As the definition of superannuation income stream relies on there being a pension under subregulation 1.06(1) of the SISR 1994, it is consistent with the legislative framework that the time at which a superannuation income stream commences for income tax purposes is aligned with the 'commencement day' for such a pension under the SISR 1994. The concept of 'commencement day' is used throughout the pension standards set out in regulation 1.06 of the SISR 1994. The concept is also used in regulation 1.07D of the SISR 1994, which places restrictions on the commutation of superannuation pensions, and in Schedule 7 to the SISR 1994, which prescribes the minimum annual payment requirements that must be met for account based pensions.

Determining the first day of the period to which the first payment of the pension or annuity relates is discussed in paragraph 76 of TR 2013/5:

76. The first day of the period to which the first payment relates must be determined by reference to the governing rules of the superannuation fund, including documentation applying to the relevant superannuation income stream. An example of documentation that is relevant in determining the commencement of a superannuation income stream is the product disclosure statement that may be required to be issued to members by the superannuation fund pursuant to the Corporations Act 2001. (emphasis added)

Furthermore, paragraph 78 of TR 2013/5 explicitly states that:

78. The commencement day for a superannuation income stream may occur before the due date of the first payment depending on the terms and conditions upon which the superannuation income stream is payable.

In your case, the date on which the superannuation income stream commences is not explicitly stated in any of the documents that you have provided. However, the account statement you provided us for Account B does state that the minimum income amount is calculated on a pro-rata basis 'based on the number of days remaining between the date of purchase and the end of the financial year.' According to clause 3 of Schedule 7 of the SISR 1994, the minimum income amount is to be calculated proportionally based on 'the number of days in the financial year that include and follow the commencement day.' This means that the commencement day of this particular superannuation income stream is the same as the date of purchase.

Notice requirements not satisfied

In view of the above, your Fund had already commenced a superannuation income stream before you gave a notice of intent to deduct. This superannuation income stream was based in whole or in part on the contributions you intended to claim as a deduction in the 2013-14 income year.

In these circumstances, a notice of intent to deduct will not be valid and you will have not satisfied the conditions prescribed under section 290-170 of the ITAA 1997. In view of this, you are not entitled to claim a deduction for the personal superannuation contributions made to the Fund in the 2013-14 income year.

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).