Date of advice: 25 July 2017

Edited version of your written advice

Authorisation Number: 1051253050759

Advice

Subject: Transfer balance cap and structured settlement

Questions

Does a debit arise in a person’s (the Taxpayer) transfer balance account under item 2 of the table in section 294-80(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

If the answer to Question 1 is yes, how much is the debit?

How does the Taxpayer notify the Commissioner of Taxation of the debit?

Answer

Yes.

The answer to question 1 also answers this question.

The Commissioner cannot make a ruling on this issue. General advice is provided instead.

This advice applies for the following period:

Income year ending 30 June 2018

The arrangement commences on:

1 July 2017

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

A person (the Taxpayer) was injured in an accident.

Subsequently, the Taxpayer was awarded a lump sum payment in damages plus costs.

After the payment of legal costs and Medicare rebates, the Taxpayer received their total payment.

The Taxpayer contributed the majority of the settlement lump sum payment into two superannuation.

These amounts have been moved between superannuation products.

Currently, the Taxpayer is a member of Fund A and Fund B.

The Taxpayer’s current account balances are comprised of the original settlement contributions plus associated earnings less income-stream payments.

The Taxpayer is in receipt of an account based pension from each of these superannuation funds.

The Taxpayer has been certified by two medical practitioners as unlikely to able to be gainfully employed in any capacity that they are reasonably qualified for because of education, experience or training due to his personal injury.

Relevant legislative provisions

Section 292-95 of the Income Tax Assessment Act 1997

Section 294-15 of the Income Tax Assessment Act 1997

Section 294-20 of the Income Tax Assessment Act 1997

Section 294-30 of the Income Tax Assessment Act 1997

Section 294-80 of the Income Tax Assessment Act 1997

Section 307-70 of the Income Tax Assessment Act 1997

Section 307-80 of the Income Tax Assessment Act 1997

Section 307-230 of the Income Tax Assessment Act 1997

Regulation 1.03C of the Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

Question 1

Summary

The Taxpayer is entitled to have transfer balance debits posted to their transfer balance account to the value of the total amount of his structured settlement contributions. The debits (there will be two due to contributions to two funds) will arise at the date that the Taxpayer first starts to have a transfer balance account pursuant to section 294-80 of the ITAA 1997. As an existing recipient of a retirement phase superannuation income stream at 1 July 2017 the debit will arise at that date.

Detailed reasoning

Transfer balance account

Pursuant to section 294-15 of the ITAA 1997, a person commences to have a transfer balance account if they have, at any time, been the recipient of a superannuation income stream. The transfer balance account commences on the later of 1 July 2017 or the day that a person first starts to be a retirement phase recipient of a superannuation income stream.

Recipient of a superannuation income stream

Subsection 294-20(1) of the ITAA 1997 states that a person is a retirement phase recipient of a superannuation income stream at a time if they have a superannuation income stream in the retirement phase at that time and a superannuation income stream benefit is payable at that time.

Subsection 294-20(2) of the ITAA 1997 states that a person is also the retirement phase recipient of a superannuation income stream at a time if:

(a) The superannuation income stream is in retirement phase at that time; and

(b) The superannuation income stream is a deferred superannuation income stream; and

(c) A superannuation income stream benefit from the superannuation stream will be payable to you after that time.

Superannuation income stream benefit

Subsection 307-80(1) states that a superannuation income stream is in the retirement phase if a superannuation income stream benefit is payable from it at that time.

In this case, the Taxpayer has previously met a condition of release (by virtue of permanent incapacity) and is currently receiving pension benefits from two income streams; one from Fund B and one from Fund C.

Consequently both superannuation income streams are in the retirement phase and the Taxpayer’s transfer balance account will commence on 1 July 2017.

Transfer balance

Section 294-30 of the ITAA 1997 states that a person’s transfer balance in their transfer balance account at a time equals the sum of the transfer balance credits less the sum of the transfer balance debits.

The transfer balance can be a negative amount where the debits exceed the credits posted to the account.

This is likely to be the case here as the debits arising from the structured settlement contributions will total more than the credits arising from the value of the two income streams in place at 1 July 2017.

Transfer balance credit

Section 294-25 of the ITAA 1997 sets out when a transfer balance credit arises and the amount of the credit. Item 1 of the table specifies that where an individual is the recipient of a retirement phase income stream just before 1 July 2017 a credit of the value of the superannuation interest that supports the income stream just before 1 July 2017 arises in the transfer balance account on 1 July 2017.

In this case the value of the credits (for the two income streams) will be dependent on the values reported by the superannuation providers as the values just prior to 1 July 2017.

Based on the information provided, the credits posted to the taxpayer’s transfer balance account are likely to be the same as the values reported by the Taxpayer’s superannuation providers.

Transfer balance debit

The table in section 294-80 sets out when a debit arises in a person’s transfer balance account.

Item 2 of the table in section 294-80 of the ITAA 1997 states that a debit will arise in a person’s transfer balance account from structured settlement contributions. The debit is the amount of the contribution and arises at the later of the time the contribution is made or the start of the day that a person first starts to have a transfer balance account. An individual can have a negative transfer balance.

Structured settlements

The contributions made by the Taxpayer to their respective superannuation funds meets the conditions of a structured settlement pursuant to section 294-80 of the ITAA 1997. The Taxpayer subsequently contributed the majority of the monies into two separate superannuation funds.

Structured settlement debits

The Explanatory Memorandum for Treasury Laws Amendment (Fair and Sustainable Superannuation Bill) 2016 (Explanatory Memorandum) states at paragraph 3.116:

The debit arises as the time the individual contributes the structured settlement amount or the time the individual first has a transfer balance account. The debit that arises is the value of the contribution. It is not necessary to link the contribution to any particular amount of capital in the retirement phase.

Consequently, as debits are available to the total value of the structured settlement contributions, the Taxpayer will have transfer balance account debits totalling the value of the structured settlement contributed to their superannuation providers, effective on 1 July 2017 when they first commence to have a transfer balance account.

Question 3

The third question raised in the application does not relate to the application of a relevant provision. The provisions that are relevant for rulings are those about the following:

(a) income tax;

(b) Medicare levy;

(c) fringe benefits tax;

(d) franking tax;

(e) withholding tax;

(f) mining withholding tax;

(g) the administration or collection of those taxes;

(h) a grant or benefit mentioned in section 8 of the Product Grants and Benefits Administration Act 2000, or the administration or payment of such a grant or benefit.

We are however, able to offer the following general advice which, whilst not binding on the Commissioner, the Australian Taxation Office will stand by and will not depart from unless:

● the law has changed since the advice was given;

● a final court decision has affected our interpretation of the law since the advice was given; or

● for any reason, the advice is no longer considered appropriate-for example, if commercial practice has changed, the advice has been exploited in an abusive and unintended way or the advice is found on reconsideration to be wrong in law.

Please note that a decision to decline to make a ruling is reviewable under the Administrative (Judicial Review) Act 1977. For further information about your review rights, please read the explanatory notes attached to this letter.

Reporting of structured settlements

Retirement phase income stream providers will have new reporting requirements from 1 July 2017. Under these requirements superannuation providers will need to report to the Australian Taxation Office (ATO) the amount of any structured settlements received after 1 July 2017.

Pre 1 July 2017 superannuation providers reported structured settlement information to the ATO under the Member Contributions Statement reporting framework. However this reporting was only a requirement from 10 March 2006.

As the Taxpayer made contributions in respect of the structured settlement prior to 10 March 2006, the Taxpayer will need to report the relevant details of any structured settlement contributions that have been made on their behalf to the ATO. An approved form is being developed for this purpose and is expected to be available in October 2017, alternatively written notification can be provided.

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