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Edited version of your written advice
Authorisation Number: 1051303679768
Date of advice: 3 November 2017
Advice
Questions
1. Where a life expectancy pension that meets the standards of subregulation 1.06(7) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) expires, and there is a capital amount remaining despite the standards of the pension not permitting a 'residual capital value' (RCV), will the leftover amount be treated as being held in an unallocated reserve?
2. Will amounts be allocated 'in a fair and reasonable manner to an account for every member' the Fund, if the value held in the unallocated reserve is allocated to the members of the Fund in proportion to their account balances?
3. If the answer to question 2 is yes, will amounts allocated in such a manner be excluded from the members' concessional contributions caps where the amounts are less than 5% of the value of the members' respective interests?
4. Can the full Concessional Contributions Cap be utilised in a financial year, as well as receiving a contribution from reserves of the fund of less than 5% of the members balance?
Advice
1. Yes
2. Yes
3. Yes
4. No
This advice applies for the following periods:
Income year ending 30 June 2018
Income year ending 30 June 2019
The arrangement commences on:
1 July 2017
Relevant facts and circumstances
The Fund is a four member self-managed superannuation fund.
The Member has a Fixed Term Pension (FTP).
This FTP was valued at the current time. It is expected that there will be an amount remaining upon the expiry of the FTP.
Assuming this amount will be in an unallocated reserve upon expiry, the Fund intends to allocate reserves to all members proportionally with respect to each member’s balance.
The Actuarial Certificate for the FTP assumes no RCV, and the rules under which the pension is provided do not permit an RCV, however the remaining amount is due to returns generated by the Fund being in excess of the required pension payments. Over the duration of the FTP, these excess returns have resulted in the remaining amount.
The Fund holds no reserves at this stage.
With respect to the superannuation interest of the members, you have confirmed that only two members hold other superannuation interests outside the fund.
The Member in receipt of the FTP only has an interest in the Fund.
A copy of the Fund trust deed has been provided.
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 Subregulation 291-25.(4)(a)
Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(a)(i)
Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(b)
Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(7)
Reasons for decision
Summary
Any leftover amounts on expiry of the life expectancy pension will be held in an unallocated reserve.
The allocation of amounts from the unallocated reserve to each member of the Fund in proportion to their account balances will be made 'in a fair and reasonable manner'.
Where the total of amounts allocated to a member in this manner for the financial year is less than 5% of the value of their interest in the Fund at the time of allocation, the allocated amounts will not be counted towards the member's contribution cap due to paragraph 291-25(4)(a) of the Income Tax Assessment Regulations 1997 (ITAR).
Detailed Reasoning
Leftover amounts on expiry will be held in an unallocated reserve
All amounts held to satisfy the payment of the life expectancy pension fall within the definition of a ‘reserve’ for the purposes of regulation 291-25.01 of the ITAR.
When the life expectancy pension expires, it is unable to have a residual capital value per the standards in subregulation 1.06(7) of the SISR and the rules under which the pension has been provided. If the pension expires without being commuted in a manner permitted by its standards (for example, a commutation applied to commence a new life expectancy or market-linked pension1, any amounts remaining cannot be treated as anything other than being in an unallocated reserve.
This reserve can no longer be held to be used ‘solely for the purpose of enabling the fund to discharge all or part of its liabilities’, as following pension expiry there are no pension liabilities to meet. Therefore, the exclusions in paragraph 291-25.01(4)(b) of the ITAR cannot apply if the amount was allocated to a member to commence a new pension.
Fair and reasonable allocation from the unallocated reserve
As above, the amounts in the unallocated reserve are no longer connected to any income stream or member benefit once the life expectancy pension expires, as the pension is unable to have any residual capital value. It is therefore capable of allocation to the various interests of the members of the Fund.
Where amounts are allocated in proportion to the value of all of the members’ interests, the amounts will be considered to be allocated ‘in a fair and reasonable manner’, one of the prerequisites for an allocation to be excluded from the concessional contributions cap in subparagraph 291-25.01(4)(a)(i) of the ITAR.
The Explanatory Memorandum to the Income Tax Assessment Amendment Regulations 2007 (No. 3), which introduced subparagraph 291-25.01(4)(a)(i) contains the following commentary on a ‘fair and reasonable’ allocation:
In determining what is fair and reasonable it is necessary to have regard to members’ proportionate interests in the superannuation plan. It would ordinarily be expected that the allocation would be in proportion to the existing interests of the members, so that particular members are not favoured over others.
The ATO is currently reviewing its position concerning appropriate practices when allocating amounts from an unallocated reserve in an SMSF. It is anticipated that further public guidance will be provided.
Allocations not counting towards concessional contributions cap
Following on from the reasoning above, where amounts are allocated in proportion to members’ interests in the Fund, and the total allocated amounts for the financial year represents less than 5% of a member’s total interests in the Fund, the allocated amounts will not be counted towards that member’s concessional contributions cap due to the operation of paragraph 291-25.01(4)(a) of the ITAR.
Any allocations that are made to a member that exceed 5% of their total interests in the Fund will count towards that member’s concessional contributions cap. Likewise, any allocated amounts that are not made in proportion to the members’ interests will count towards the relevant member(s) concessional contributions cap(s).
The exclusion in paragraph 291-25.01(4)(a) of the ITAR is tested against all allocations to a member within a financial year. In other words, if amounts are allocated to a member that in total exceed 5% of their total interests in the Fund in the year, all of the amounts will count towards their concessional contributions cap – there will not be an amount within the total allocations for the year that is excluded due to being less than 5% of their total interests.
Noting that such a commutation will be limited to a lump sum calculated in accordance with regulation 1.08 of the SISR.
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