Edited version of your written advice

Authorisation Number: 1051269858014

Date of advice: 22 August 2017

Ruling

Subject: Concessional contributions

Question

Is the payment of a 'retirement bonus’ by the trustee for the Fund a concessional contribution for the purposes of subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997), if paid from a reserve, on 30 June in the year a member commences a pension?

Answer

Yes.

This ruling applies for the following periods:

Income year ended 30 June 2017

Income year ending 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Fund is an APRA regulated fund.

The Fund is a complying superannuation fund.

The Fund does not maintain segregated assets for its accumulation and pension members.

The Trustee maintains a Reserve Account for the Fund, in accordance with the Fund’s trust deed (the Deed).

The Deed also outlines the debits and credits that must be made to the Reserve Account by the Trustee, including crediting income earned on fund investments; gains on the realisation of assets, and debiting payment of expense amounts.

The Fund’s financial reports for the year ended 30 June 2015 and 30 June 2016 confirm that the Trustee maintains a number of reserves.

The Fund’s financial statements set out details of the General Reserve and show credits and debits made to this reserve during a financial year including crediting net investment revenue and debiting investment earning allocated to members.

The Trustee proposes to pay a 'retirement bonus’ to eligible members from the General Reserve on 30 June in the year a member commenced a pension.

To be eligible for the 'retirement bonus’ on any 30 June, a member must:

● have a pension account on 30 June from which an account based pension is paid;

● have commenced that pension after the previous 1 July (or 1 June 2016 for retirement bonus allocated on 30 June 2017);

● have been a member of the Fund for more than 12 months before the pension commenced; and

● not have received a retirement bonus previously.

The 'retirement bonus’ will be calculated at a certain percentage rate of the account balance at commencement of the pension, up to a limit, including all contributions and rollovers into the member’s accumulation account before commencement.

The 'retirement bonus’ percentage rate is expected to remain constant in subsequent financial years, but the Trustee may change the percentage in the future.

The 'retirement bonus’ represents a distribution back to the member of a foregone tax benefit, arising as a result of no tax being payable on capital gains from the proportion of the Fund’s assets attributable to a member’s account balance once the member elects to receive a pension.

Unit prices applicable to accumulation accounts fully provide for tax that may be paid when capital gains are realised.

A deferred capital gains tax liability is calculated on all accrued gains daily and this liability is allowed for in calculating member unit prices.

When a member moves into pension phase their accumulation unit entitlements are sold and pension units are purchased.

Each month an amount is determined estimating the approximate amount of 'retirement bonus’ payable to members who have elected to convert from accumulation to pension phase during that month.

An accrual is then reflected in the General Reserve to cover the expected liability.

On a quarterly basis, the anticipated reduction in the deferred tax liability due to the capital gains tax saving is also transferred to the General Reserve.

The amount transferred takes into account the movement in deferred tax balances for each investment option and also the value of member balances transferred out of accumulation into pension options.

Just before 30 June each financial year, the amount payable to each eligible member is confirmed and paid into their pension account from the Fund’s General Reserve, with the amount being allocated to the member being treated as an increase in the number of units held in their chosen investment options.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 291-25(1)

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

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

Income Tax Assessment Regulations 1997 Regulation 291-25.01

Income Tax Assessment Regulations 1997 Subregulation 291-25.01(4)

Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(a)

Income Tax Assessment Regulations 1997 Sub-subparagraph 291-25.01(4)(a)(i)(B)

Income Tax Assessment Regulations 1997 Subparagraph 291-25.01(4)(a)(ii)

Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(b)

Reasons for decision

Summary

The 'retirement bonus’ amounts allocated are not covered by the exclusion in paragraph 291-25.01(4)(a) of the Income Tax Assessment Regulations 1997 (ITAR 1997) and will therefore be concessional contributions for the purposes of subsection 291-25(3) of the ITAA 1997.

Detailed reasoning

Concessional contributions

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

Subsection 291-25(3) of the ITAA 1997 includes an amount in a member’s concessional contributions where an amount in a complying superannuation plan is allocated by the superannuation provider in relation to the plan for the member in accordance with conditions specified in the regulations.

The relevant regulation in relation to subsection 291-25(3) of the ITAA 1997 is regulation 291-25.01 of the ITAR 1997.

Under subregulation 291-25.01(4) of the ITAR 1997 an amount allocated from a reserve (other than an amount covered by subregulation 291-25.01(2)) for a member is an amount included in a member's concessional contributions unless the exclusion in either paragraph 291-25.01(4)(a) or paragraph 291-25.01(4)(b) of the ITAR 1997 applies. The exclusion in paragraph 291-25.01(4)(b) is not relevant in the current case.

Allocation from a reserve

'Reserve' is not defined in the ITAA 1997 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.

In ATO Interpretative Decision ATO ID 2015/21 Superannuation ECT: concessional contributions - reserve (ATO ID 2015/21), the Commissioner concluded that 'reserve' for the purposes of former subregulation 292-25.01(4) of the ITAR 1997, 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.

In the current case, the Deed states that the Trustee must maintain a Reserve Account, and also sets out the credits and debits to be made to the Reserve Account, including crediting all income earned on the Fund’s investments, gains on realisation of assets, any other amounts which may be credited to the reserve and debiting payment of expense amounts.

The Fund’s financial reports recognise this Reserve Account as a General Reserve.

The Fund’s financial statements show a number of credits and debits being made to the General Reserve, including the crediting of net investment earnings and the debiting of investment earnings allocated to members.

The General Reserve maintained by the Fund is consistent with the Commissioner’s view of what constitutes a reserve for the purposes of regulation 291-25.01 of the ITAR 1997. It is also evident that the amounts in the General Reserve relate to the Fund in general and therefore relate to all members of the Fund.

Exclusion under paragraph 291-25.01(4)(a)

An amount will not be included in a member’s concessional contributions in accordance with paragraph 291-25.01(4)(a) of the ITAR 1997 where:

(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

Where an allocation from the reserve is made in a fair and reasonable manner to the account of a member who is a member of a class of members, the allocation may be excluded from the member’s concessional contributions by the combined operation of sub-subparagraph 291-25.01(4)(a)(i)(B) and subparagraph 291-25.01(4)(a)(ii) of the ITAR 1997.

Sub-subparagraph 291-25.01(4)(a)(i)(B) of the ITAR 1997 requires that two tests are satisfied. That is, the allocation from the reserve must be made to an account for every member of the class of members and the amount in the reserve must relate only to that class of members.

The words 'relate to’ are considered to have a very wide meaning and indicate a connection or association between two subject matters (see Narain v Parnell [1986] FCA 84, (1986) 64 ALR 561, (1986) 9 FCR 479). However, in sub-subparagraph 291-25.01(4)(a)(i)(B) of the ITAR 1997 the word 'only’ has been included so that the amount in the reserve 'relates only to’ that class of members that receive an allocation to their account.

There is no indication in the ITAA 1997 or the ITAR 1997 of what is meant by 'a class of members’ for the purposes of regulation 291-25.01 of the ITAR 1997.

The Commissioner has previously considered the meaning of 'class’ in respect of a superannuation fund in the context of the superannuation surcharge legislation. In the attachment to Superannuation Contributions Ruling SCR 1999/1 Superannuation contributions: allocated surplus amounts for superannuation (accumulated benefits) schemes, the Commissioner adopts examples developed by the Australian Government Actuary. The ruling states that 'a 'class’ of membership is 'any administratively natural subdivision of the scheme’.

In this case, the members who receive an allocation to their account from the General Reserve are those members who meet the eligibility criteria for receiving a 'retirement bonus’. It is not necessary to decide whether those members may be grouped for administrative purposes of the scheme and may, therefore, be a class of members for the purpose of subregulation 291-25.01(4) of the ITAR 1997, as the General Reserve holds more funds than are required for payments to members eligible to receive a 'retirement bonus’. These funds may be used for a number of purposes in addition to making the 'retirement bonus’ payments.

The Explanatory Statement to the Income Tax Assessment Amendment Regulations 2007 (No 3) which inserted former regulation 292-25.01 of the ITAR states that:

Generally an amount that is allocated from a reserve will be a concessional contribution unless it meets the conditions outlined in subregulation 292‑25.01(4).

The first condition is that the amount is allocated to all members of the fund, or class of members to which the reserve relates on a fair and reasonable basis.

Whilst you contend that the reserve that relates only to that class is the Fund’s tax provision for capital gains tax in respect of those members only, the Commissioner does not consider a tax provision to be a reserve. Regardless of how the liability to pay the 'retirement bonus’ might be recorded in the General Reserve, the allocation is made from that General Reserve and it is a reserve which relates to the Fund in general and accordingly relates to all members of the Fund.

The 'retirement bonus’ amounts allocated are not covered by the exclusion in paragraph 291-25.01(4)(a) of the ITAR 1997 and are therefore concessional contributions for the purposes of subsection 291-25(3) of the ITAA 1997.

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