Edited version of private advice

Authorisation Number: 1051507227471

Date of advice: 12 November 2019

Ruling

Subject: Allocation of benefits from a Reserve to a member

Question 1

Will an amount that is paid to a person as a superannuation lump sum benefit directly from the Reserve be treated as a concessional contribution as defined in subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No, a super lump sum cannot be paid to a member directly from a Reserve, an amount from a Reserve must firstly be allocated to a member's account and then subsequently paid to the member. The amount transferred to a member account from the Reserve will be a concessional contribution unless it is allocated in a fair and reasonable manner, to the member, and it is less than 5% of the value of the member's super interest in the financial year at the time of allocation.

Question 2

Will an amount that is paid as a lump sum death benefit directly from the Reserve to:

·         a dependent of the deceased member;

·         or a deceased member's estate

be treated as a concessional contribution as defined in subsection 291-25(3) of the ITAA 1997 for either the deceased member or any ultimate beneficiary of the lump sum death benefit?

Answer

The Commissioner declines to rule on this issue as at this point in time it is purely speculative and would require the Commissioner to make a number of assumptions. However some general guidance is provided below.

Question 3

If a lump sum death benefit is paid directly from the Reserve as outlined at issue 2, how would the answer to issue 2 change if amounts had previously been allocated from the Reserve:

·         directly to a person as a lump sum benefit,

·         to an accumulation account in the fund for any member of the fund, or

·         a combination of the two?

Answer

The Commissioner declines to rule on this issue as, at this point in time, it is purely speculative and would require the Commissioner to make a number of assumptions. However general guidance is provided below.

Question 4

Can all of the fund's investment return be allocated to the member's account balances (in this case, the member's account-based pension balance(s) and/or accumulation accounts) - is any amount required to be allocated to the Reserve account?

Answer

The allocation of investment returns fall under the operating standards as set out in section 31 of the Superannuation Industry (Supervision) Act 1993 (SISA) and the Superannuation Industry (Supervision) Regulations 1994 (SISR) and therefore are not matters on which a private ruling can be provided. In this particular case the Reserve is not a Reserve for the purposes of the SISA or the SISR however for completeness some general guidance in relation to the allocation of costs and investments returns has been provided below.

Question 5

Can general expenses, such as tax, administration fees, audit fees etc, (i.e. those not directly attributable to a particular member or member account balance) be debited from the Reserve?

Answer

The determination of costs fall under the operating standards as set out in section 31 of the SISA and the SISR and therefore are not matters on which a private ruling can be provided. In this particular case the Reserve is not a Reserve for the purposes of the SISA or the SISR however for completeness some general guidance in relation to the allocation of costs and investments returns has been provided below.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund is a self-managed superannuation fund.

The sole Member of the Fund is 81 years old (the Member).

The Member of the Fund is the director of the corporate trustee (the Trustee).

The Member of the Fund commenced a superannuation income stream (the Pension) on 5 March 2003.

The Pension:

a.    complied with regulation 1.06(7) of the SISR;

b.    was payable to the Member for a term of 15 years; and

c.    ceased on 4 March 2018 at the expiry of the term.

The Trustee of the Fund:

d.    no longer holds any liabilities in relation to the Pension, however

e.    it holds leftover capital that formerly supported the Pension liabilities. This leftover capital constitutes Reserves for the purposes of regulation 1.03(1) of the SISR and section 115 of the SISA.

The Member is currently in receipt of an account based pension that complies with subregulation 1.06(9A) of the SISR.

Ruling 8.19 of the governing rules of the Fund state the Trustee, with the approval of the Members, may use amounts held in the Fund's Reserve for any purpose, including providing additional benefits.

The Trustee of the Fund is considering the following actions:

f.     paying a superannuation lump sum benefit to the Member directly from the Reserve;

g.    allocating an amount from the Reserve to an accumulation account in the Fund for the Member (and/or future Members of the Fund);

h.    a combination of the above; and

i.      in the event of the death of the Member, paying a lump sum death benefit directly from the Reserve to:

                                  i.    a dependent of the deceased Member; or

                                 ii.    the deceased Member's estate.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 291-25

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 paragraph 291-25.01(4)(b)

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

Superannuation Industry (Supervision) Act 1993 section 31

Superannuation Industry (Supervision) Act 1993 section 115

Superannuation Industry (Supervision) Regulations 1993 subregulation 1.03(1)

Superannuation Industry (Supervision) Regulations 1993 subregulation 1.06(7)

Superannuation Industry (Supervision) Regulations 1993 subregulation 1.06(9A)(A)

Superannuation Industry (Supervision) Regulations 1993 regulation 5.02

Superannuation Industry (Supervision) Regulations 1993 regulation 5.03

Superannuation Industry (Supervision) Regulations 1993 regulation 6.21

Taxation Administration Act 1953 section 357-55

Taxation Administration Act 1953 section 357-110

Taxation Administration Act 1953 paragraph 353-35(2)(a)

Taxation Administration Act 1953 section 359-35

Reasons for decision

Summary

The allocation will not meet the exception, and will be considered a concessional contribution in accordance with subsection 291-25-(3) of the ITAA 1997.

Detailed reasoning

These reasons for decision accompany the Notice of private ruling for Wilkie Superannuation Fund.

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

The allocation will not meet the exception, and will be considered a concessional contribution in accordance with subsection 291-25(3) of the ITAA 1997.

Detailed reasoning

Reserves

Regulation 1.03 of the SISR defines Reserves, in relation to a superannuation entity, to mean Reserves maintained under section 115 of the Act. Section 115 of the SISA provides that a trustee may maintain a Reserve for a particular purpose, unless the governing rules of the entity prohibit the maintenance of a Reserve for that purpose.

The Australian Prudential Regulation Authority has issued Prudential Practice Guide SPG 222 - Management of Reserves which discusses the use of Reserves in super entities for the purpose of complying with the SISA and SISR. It describes Reserves as monies which form part of the net assets of the fund, and which have been set aside for a clearly stated purpose.

SPG 222 also states that Reserves in super funds are monies that have not been allocated to members, but that not all unallocated monies are Reserves.

For the purposes of the SISA and the SISR, the views applied by APRA on the meaning of Reserves are equally applicable to SMSFs.

The term Reserve is not defined in the ITAA 1997 or the Income Tax Assessment Regulations 1997 (ITAR 1997). It is therefore given its ordinary meaning having regard to the context in which it appears and the purpose for which the relevant regulation was enacted[1]

The Commissioner has issued SMSFRB 2018/1 which sets out the Commissioner's regulatory concerns with the use of Reserves in SMSF's, and two ATO ID's which provide further guidance on the Commissioner's views about Reserves. In ATO ID 2015/21 -Superannuation ECT: concessional contributions - Reserve, the Commissioner considered that 'Reserve' as it is used in regulation 291-25.01 of the ITAR 1997 is intended to have a broad meaning to maintain the integrity of the contributions caps and includes amounts set aside from amounts allocated to particular members to be used for a particular purpose.

The Commissioner's view set out in ATO ID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension Reserve account' supporting 'complying lifetime pension' is that the pension account and the pension Reserve account are taken together to represent a 'Reserve' for the purposes of regulation 291-25.01 of the ITAR 1997.

However, the amounts in these accounts comprise an amount available to the trustee, not the member, to satisfy the trustee's liability to pay the complying lifetime pension. We do not consider the amounts in these accounts are 'Reserves' for the purposes of the SISA and SISR.

Amounts held in Reserves will generally be allocated in accordance with the provisions of the fund's trust deed.

Where Reserves exist and there are no remaining members, the Reserves will be dealt with according to the wind up provisions contained in the fund's trust deed.

Concessional contributions

Subsection 291-25 of the ITAA 1997 provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 292-25(2), and each amount covered under subsection 291-25(3).

Subsection 291-25(3) of the ITAA 1997 states that an amount in a complying superannuation plan is covered under that subsection if it is allocated by the superannuation provider in relation to the plan for the individual in accordance with the conditions specified in the regulations.

Regulation 292-25.01 of the ITAR 1997 sets out the conditions for the purpose of allocating an amount in a complying superannuation plan for subsection 291-25(3) of the ITAA 1997.

Regulation 252-25.01 of the ITAR 1997 provides that an amount is included in a person's concessional contributions for a financial year if it is allocated from a Reserve maintained by the trustee unless it meets one of the exceptions in subregulation 292-25.01(4).

Relevantly an amount is excluded from being a contribution under subregulation 292-25.01(4) of the ITAR 1997 if one of the exceptions in paragraph 291-25.01(4)(a) or (b) apply. These provisions essentially require the following:

Paragraph 291-25.01(4)(a):

The amount is allocated in a fair and reasonable manner to an account for every member of the fund, or if the member is a member of a class of members and the Reserve only relates to that class of members - to an account for every member of that class, and the amount allocated for the financial year is less than 5% of the member's superannuation interest in the fund at that time; or

Paragraph 291-25.01(4)(b)

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 and payable in respect of a superannuation income stream that are payable by the fund at the time, and any of the following applies:

-   the amount has been allocated to satisfy a pension liability of the plan paid during the financial year;

-   on commutation of the income stream, except as a result of death of the primary beneficiary, the amount is allocated to the recipients to commence another income stream as soon as practicable; or

-  as soon as practicable after the commutation of an income stream as the result of the death of the member as a superannuation, the amount:

-  is allocated to a death benefit dependant to discharge liabilities in respect of a superannuation income stream that is payable by the plan as a result of the death; or

-  is paid as a superannuation lump sum that is a superannuation death benefit.

Life expectancy pension

Pensions provided under the rules of a super fund that meet the standards of subregulation 1.06(7) of the SISR are generally referred to as fixed term complying pensions.

In accordance with paragraph 1.06(7)(f) the rules of a pension must, in order to meet the standards, ensure that the pension does not have a residual capital value.

Therefore if the pension expires, without being commuted in a manner permitted by the standards, any amounts remaining will be treated as being held in an unallocated Reserve for the purposes of the ITAA 1997 and the ITAR 1997. However the amount held will not be considered a Reserve for the purposes of the SISA and the SISR.

Application to the current case

It is assumed in this case that the Reserve was not used for any other purpose other than to pay the fixed term pension.

As the pension ceased in 2018, any amount held in the Reserve that was established for supporting the pension is no longer connected to that pension and cannot be considered to form part of the benefits of the member whose pension the amount supported.

In addition, the Reserve is no longer held for the sole purpose of enabling the fund Trustee to discharge all or part of its liabilities as the pension has expired and accordingly there are no longer pension liabilities to meet. Therefore, the exclusion in paragraph 291-25.01(4)(b) of the ITAR cannot apply if the amount is allocated to a member.

Rule 6 of the fund's governing rules deals with when and how a benefit is paid, and specifically states at clause 6.29 that the Trustee must establish one or more separate Member Accounts as the source of each type of benefit in respect of the member.

When transferring the amount from the Reserve to the member's account the amount will not be a concessional contribution if the amount that is allocated is less than 5% of the value of the member's interest at the time of allocation.

Questions 2 & 3

Private rulings

Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) sets out the private ruling regime. Section 359-35 details when the Commissioner may decline to make a private ruling.

Paragraph 359-35(2)(a) of Schedule 1 to the TAA provides that the Commissioner may decline to make a private ruling where he believes that making the ruling would prejudice or unduly restrict the administration of a tax law.

Taxation Ruling TR 2006/11 provides further details on when a private ruling application does not have to be dealt with and provides an example of when making the ruling would prejudice or unduly restrict the administration of a tax law including a request where the scheme is merely hypothetical.

The power to decline to rule in such a situation recognises that the ATO is not in the business of giving advice as a purely academic exercise.

In addition the Commissioner may also decline to rule under section 357-110 of Schedule 1 to the TAA where the correctness of a private ruling would depend on which assumptions were made about a future event or other matter.

In this particular case it appears that the scheme in relation to issues 2 and 3 is purely speculative and it has not been developed sufficiently for it to be reasonably considered in serious contemplation at this time.

In addition there is insufficient information because the relevant event is still in the future and the specific outcome is unknown, particularly as the applicant has outlined a number of different events that may occur. The Commissioner would therefore need to make assumptions about how the proposed arrangements may apply about a future event or factor.

For the reasons above we should decline to make a ruling with regards to issues 2 and 3.

However, for completeness we provide the following general guidance in relation to money held in a Reserve.

Division 6.2 of the SISR contains the payment standards for regulated superannuation funds and details when a member's benefits may be or are required to be cashed.

Subregulation 6.21 of the SISR requires that a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.

As noted earlier amounts held in an unallocated Reserve are not attributable to a specific member. At the time a life expectancy pension ceases the amount held in the Reserve to support the pension is no longer connected to that income stream and cannot be considered to form part of the benefits of the member whose pension the amount supported.

There is nothing in the SISA or the SISR that allows a benefit to be paid directly from an unallocated Reserve to a member or a beneficiary as this amount is not considered to be part of a member's interest until such time as the Trustee resolves to allocate it to an existing or new member's superannuation interest.

Therefore, any amount that is held in a Reserve at the time of the member's death will not form any part of a death benefit payable to a member's beneficiaries or deceased estate for the purposes of the SISA and SISR.

It is also noted that in the current case Clause 5.2 of the Wilkie Superannuation Fund's Trust Deed states:

5.2         If a member dies the Trustee must pay a benefit equal to the Member's Account Balance.

This means that in order to meet the requirements of the Trust Deed the fund trustee is only able to pay an amount equal to the member's account balance as at the Member's death. They are not able to pay amounts directly from the funds Reserves.

If the fund trustee makes the beneficiary a member of the fund, pursuant to the trust deed of the fund, they may resolve to allocate the amount in a Reserve to the beneficiary's superannuation interest. Such an allocation may be considered to be a concessional contribution unless it meets an exception in subregulation 292-25.01(4) of the ITAR 1997.

Any allocated to the beneficiary's superannuation interest will be subject to the preservation rules for the beneficiary set out in the SISA and SISR. Payments made out of the beneficiary's interest will be made because they are a fund member, and will therefore be superannuation member benefits.

Questions 4 & 5

Section 357-55 of Schedule 1 to the TAA lists provisions of Acts and regulations that are relevant for rulings. The SISA and the SISR are not an Act or regulation for which a private ruling can be provided.

While a private ruling cannot be given in respect of SISA and SISR matters the following general guidance has been provided.

Part 3 of the SISA provides a system of prescribed standards applicable to the operation of regulated superannuation entities. Section 31 of the SISA provides that regulations may prescribe standards applicable to the operation of regulated superannuation funds and trustees of those funds. The standards that may be prescribed include, but are not limited to, the charging of fees to members of a fund and the allocation of investment returns. Trustees of a super fund must ensure that the prescribed standards applicable to the operation of the fund are complied with at all times.

Regulation 5.02 of the SISR provides that the trustee must determine the costs to be charged against a member's benefits which may include the operating costs and any administrative, insurance and tax costs of the fund. In determining the costs to be charged against a member's benefits the trustee must ensure that the costs of the fund are distributed in a fair and reasonable manner between all members of the fund.

In relation to funds which maintain investment Reserves regulation 5.03 of the SISR requires the trustee to have regard to the return to the fund on its investments, the extent to which the costs of establishing, operating or terminating the fund exceed or fall below the costs actually debited to the member's account and to have regard to the level of Reserves in the fund. The determination made under regulation 5.03 must be fair and reasonable between members of the fund.

As noted previously the fund Reserve in this particular case is not considered a Reserve for the purposes of the SISA and the SISR as it was a Reserve which solely comprised an amount to satisfy the trustee's liability to pay the 15 year term pension which ceased on 4 March 2018.

[1] Project Blue Sky Inc v. Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28

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).