Edited version of your written advice

Authorisation Number: 1012758141685

Advice

Subject: Allocation from a reserve

Questions

1. Can the trustee of a self-managed superannuation fund (the Fund) pay an amount from a reserve directly to a member of the fund in satisfaction of the required minimum pension payment?

2. Are amounts allocated from the reserve to a member of a self-managed superannuation fund treated as concessional contributions under subregulation 292-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR 1997)?

Answers

1. No.

2. No, provided the allocation from the reserve to the Member's accumulation account does not exceed 5% of the value of the member's interest in the self-managed superannuation fund at the time of the allocation

This advice applies for the following period:

Income year ending 30 June 2015

The arrangement commences on:

1 July 2014

Relevant facts and circumstances

The Fund is a single member self-managed superannuation fund.

The Fund pays superannuation income stream benefits from an account-based pension (the Pension) to the only member of the fund (the Member).

The Pension commenced several years ago and meets the conditions under subregulation 1.06(9A) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Several years ago, the trustee of the Fund (the Trustee) established a reserve in the Fund. The reserve has accumulated over time from earnings and growth on the assets backing the reserve.

The purpose of the reserve has recently been changed and the reserve is now said to be used solely to pay the required minimum pension payment in respect of the Pension.

The Trustee proposes to pay amounts from the pension reserve directly to the Member on an annual basis as payment of the minimum pension payment required to be paid by legislation on the Pension.

Relevant legislative provisions

Taxation Administration Act 1953 Section 357-55

Taxation Administration Act 1953 Division 359

Taxation Administration Act 1953 Section 359-5

Income Tax Assessment Act 1997 Section 291-25

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

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

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

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

Income Tax Assessment Regulations 1997 Subregulation 292-25.014(b)(i)

Income Tax Assessment Regulations 1997 Subregulation 292-25.014(b)(ii)

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

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

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Superannuation Industry (Supervision) Regulations1994 Subregulation 1.06(1)

Superannuation Industry (Supervision) Regulations1994 Subregulation 1.06(9A)

Reasons for decision

Summary

An amount cannot be paid from the reserve directly to the Member in satisfaction of the minimum Pension payment requirement.

An amount cannot be allocated from the reserve to the Member's pension account.

An amount allocated from the reserve to the Member's accumulation account will not be treated as a concessional contribution under subregulation 292-25.01(4) of ITAR 1997 provided it does not exceed 5% of the value of the Member's interest in the Fund at the time of allocation.

Detailed reasoning

Minimum pension requirements

Superannuation income streams must comply with the minimum standards set out in the Superannuation Industry (Supervision) Regulations 1994 (SISR), in order to be a 'pension' or an 'annuity' under the Superannuation Industry (Supervision) Act 1993 (SISA) and to be taxed as a superannuation income stream benefit.

In accordance with subregulation 1.06(1) of the SISR, a pension is a superannuation income stream which meets the standards of subregulation 1.06(9A) of the SISR and which does not permit the capital supporting the income stream to be added to by way of contribution or roll-over once it has commenced.

With respect to account-based pensions, subregulation 1.06(9A) of the SISR provides that the rules for the provision of a pension meet the standards of that subregulation if the rules ensure, among other things, that:

a) the payment of the pension is made at least annually; and

b) the total of payments in any year is at least the amount calculated under clause 1 of Schedule 7 of the SISR.

Further, paragraph 85 of Taxation Ruling TR 2013/5 titled Income tax: when a superannuation income stream commences and ceases (TR 2013/5), in the context of when the value of tax free and taxable components of a superannuation income stream benefit must be determined, states:

It necessarily follows that to ensure the tax free and taxable proportions are correctly determined for a superannuation income stream, the superannuation fund and the member must ensure that all contributions (including roll-over amounts) which are intended to form part of the capital supporting the superannuation income stream have been made before the superannuation income stream commences. …

In this case, the Fund is paying superannuation income stream benefits to the Member from an account-based pension that meets the conditions under subregulation 1.06(9A) of the SISR. If the Fund were to add to the capital supporting the account-based pension by way of an allocation from the reserve to the pension account; or if the Fund was to pay an amount directly from the reserve to the Member instead of making the required minimum payment from the pension account, the pension would no longer meet the relevant standards.

Where a purported superannuation income stream fails to meet the relevant standards in an income year, the superannuation income stream will be taken to have ceased at the start of that income year for income tax purposes. Therefore, from the start of that income year the superannuation interest is no longer supporting a superannuation income stream and the payments made from that superannuation interest are not superannuation income stream benefits (paragraph 100 of TR 2013/5).

Therefore, the Fund cannot allocate an amount from the reserve to the Member's pension account or pay an amount directly from the reserve to the Member in satisfaction of the required minimum pension payment.

Concessional contributions

Subsection 291-25(1) of the ITAA 1997 provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 291-25(2) of the ITAA 1997 and each amount covered under subsection 291-25(3) of the ITAA 1997.

Contributions which are covered by subsection 291-25(2) of the ITAA 1997 are generally contributions made by or for a person to a complying superannuation plan and are included in the assessable income of a superannuation provider.

Subsection 291-25(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.

Provisions in the Act that inserted Division 291 into the ITAA 1997 operate to ensure that the regulations applying to concessional contributions in Division 292 of the ITAA 1997 continue to apply to Division 291. Consequently, regulation 292-25.01 of ITAR 1997 sets out these conditions.

Generally, an amount that is allocated from a reserve to a member will be a concessional contribution for the member unless it meets the conditions outlined in subregulation 292-25.01(4) of the ITAR 1997 which provide for exceptions to transfers from reserves being considered concessional contributions.

Relevantly, subregulation 292-25.01(4) of the ITAR 1997 provides that an amount that is allocated from a reserve will not be treated as concessional contributions 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 …

(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; …

Meaning of 'reserve'

The term 'reserve' is not defined in the ITAA 1936 or the ITAR 1997. Therefore, the meaning of 'reserve' is to be determined by reference to its ordinary meaning and the context in which it is used.

The meaning of 'reserve' for the purposes of Division 292 of the ITAA 1997, the immediate predecessor to Division 291, is considered by the Commissioner in ATO Interpretative Decision ATOID 2012/32 titled Superannuation Excess Contributions Tax: concessional contributions - reserves. The Commissioner has concluded 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.

The purpose of a reserve may include managing member benefit entitlements, for investment fluctuations or self-insurance liabilities. Therefore, the reserve, in this case, is the amount said to be set aside from the amounts allocated to the Member for the purpose of meeting the minimum Pension payments.

However, the Explanatory Statement to the Income Tax Assessment Amendment Regulations 2007 (No. 3), which introduced regulation 292-25.01 of the ITAR discusses the second condition outlined in subregulation 292-25.01(4) of the ITAR 1997, states:

The second condition applies to allocations from a reserve used solely for the purpose of discharging superannuation income stream liabilities that are currently payable. For example, a fund is paying a lifetime income stream to a member and maintains a reserve to meet the payments in case the person lives longer than expected.

In this case, superannuation income stream benefits are paid to the Member from a pension in relation to which there is an account balance attributable to the Member. In accordance with clause 1 of Schedule 7 of the SISR, the minimum pension payment required to be paid to the Member in any year is calculated with reference to the account balance attributable to the Member on 1 July in the financial year in which the payment is made. As such, there are no contingencies for which the Fund would need to maintain a reserve to ensure that the minimum pension payment requirements are met.

In addition, as discussed above, the Fund cannot allocate an amount from the reserve to the Member's Pension account to meet the minimum Pension payment requirements as this would add to the capital of the Pension.

Therefore, the reserve maintained by the Fund, in this case, cannot be said to be maintained solely for the purpose of discharging superannuation income stream liabilities that are currently payable by the Fund. Consequently, subregulation 292-25.01(4)(b) does not apply in this case.

However, as the Member is the sole member of the Fund, an amount allocated from the reserve to the Member's accumulation account will not be considered a concessional contribution if the amount that is allocated for the financial year is less than 5% of the value of the Member's interest in the Fund at the time of allocation.

Conversely, an amount allocated from the Fund's reserve to the Member will be considered a concessional contribution if the amount that is allocated for the financial year is more than 5% of the value of the Member's interest in the Fund at the time of allocation.

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