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Edited version of private advice

Authorisation Number: 1051532452295

Date of advice: 25 June 2019

Ruling

Subject: Member's lifetime pensions and concessional contributions

Question

Where there is a full commutation of the member's lifetime pensions and the total capital that was backing that pension is used immediately to commence an account based pension for the member, will an amount be counted as a member's concessional contribution under subsection 291-25 (3) of the Income Tax Assessment Act 1997 (ITAA 1997) ?

Answer

Yes

This ruling applies for the following period:

Income year ending 30 June 2018

The arrangement commences on:

1 July 2017

Relevant facts and circumstances

The Fund is a complying self-managed superannuation fund.

1.    The Member is a member of the Fund

2.    During the 2004-2005 income year, the trustee of the Fund (the Trustee) commenced paying the Member ( the Member) two separate lifetime pensions (Lifetime pensions) that meet the requirements of subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR)

3.    A copy of a letter dated mid 2004 from the Member to the trustees requesting for payment of pensions has been provided.

4.    A copy of a trustee minute for a trustee meeting held in mid-2004 detail the following resolutions:

5.    As noted in the minutes written confirmation was provided to the Member dated mid 2004 of the pension entitlement and conditions such as the requirement for a minimum pension payment.

6.    Pension Accounts Balances as at ddmmyy and the pension amounts for the 17/18 financial year have been provided.

7.    A copy of the Statement of Financial Position as at 30 June 2017, which shows the comparative balances for 2016 has been provided by the applicant.

8.    The Member wishes to commute the Lifetime pensions and use the total of the amounts standing again each Lifetime pension reserve account to immediately commence separate account based pensions that meet the rules under subregulation 1.06(9A) of the SISR.

9.    The maximum commutation amount of the Lifetime Pensions have been calculated in accordance with paragraph 1.06(6)(g) of the SISR.

10.  The value of the assets supporting the Lifetime pensions exceeds the maximum commutable amount

11.  The pension reserve accounts have been used solely to enable the Fund to discharge its liabilities in respect of the individual Pensions (1.06(6) of the SISR)

12.  The requested changes are not in conflict with the existing SMSF Trust Deed.

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 291-25.01

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

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(6)

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(6)(g)

Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

Reasons for decision

Summary

13.  In accordance with paragraph 1.06(6)(g) of the SISR, the lump sum available on commutation of the Lifetime pensions is limited to the amount calculated using the pension valuation factors (PVFs) in Schedule 1B of the SISR (the maximum commutation value).

14.  If the amount equal to the maximum commutation value of the Lifetime pensions is used to commence an account based pension as soon as practicable, it will not count as the Member's concessional contribution under subsection 291-25(3) of the ITAA 1997.

15.  Following the commutation of the Lifetime pensions, these pensions will cease, and the balance of the relevant reserve account which is in excess of the maximum commutation value of the pensions ceases to be a pension reserve being used solely for the purpose of enabling the trustee of the Fund to discharge all or part of its liabilities as soon as they become due in respect of these pensions.

16.  As the reserve from which any additional allocations are to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the ITAR 1997, if the balance of the reserve account is allocated to the Member to commence account based pensions, the amount of the allocation will be the Member's concessional contribution in accordance with subsection 291-25(3) of the ITAA 1997.

Detailed reasoning

Concessional contributions

17.  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.

18.  Subsection 291-25(3) of the ITAA 1997 provides that concessional contributions for a financial year include certain amounts allocated for the individual in accordance with conditions specified in the regulations. The relevant regulation is regulation 291-25.01 of the ITAR 1997.

19.  Subregulation 291-25.01(4) of the ITAR 1997 provides that an amount allocated from a reserve is treated as being allocated in a way covered by subsection 291-25(3) of the ITAA 1997 unless certain exclusions apply.

20.  Relevantly, paragraph 291-25.01(4)(b) of the ITAR 1997 excludes an amount that is allocated from a reserve if:

(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) ...

(B) on the commutation of the income stream, except as a result of the death of the primary beneficiary, the amount is allocated to the recipient of the income steam, to commence another income stream, as soon as practicable; ...

Meaning of 'reserve'

21.  There is no definition of 'reserve' in either the ITAA 1997 or the ITAR 1997.

22.  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 subregulation 292-25.01(4) 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. (Note that subregulation 292.25-01 was renumbered to 291.25-01 with effect from March 2017).

23.  When the Member commenced the Lifetime pensions, they essentially exchanged an amount of capital for a right to receive an income stream, and a right for a certain amount to be returned to them in the event the pensions are commuted.

24.  The amount that the Member exchanged for these rights became an amount that is available to the trustee of the Fund, not the Member, to satisfy the trustee's liability to pay the pensions. Therefore, the maximum commutation value of the Lifetime pensions plus the amount in the pension reserve represent a 'reserve' for the purposes of regulation 291-25.01 of the ITAA 1997.

Commutation of the income streams

25.  If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of subregulation 291-25.01(4) of the ITAR 1997, one of the exceptions in the subregulation must be met.

26.  Paragraph 291-25.01(4)(b) of the ITAR 1997 refers to amounts being allocated from a reserve used solely for the purpose of enabling a fund to discharge its liabilities in respect of income stream benefits. In this case, the pension reserve created when the member commenced the pensions has been used solely to support the payment of these pensions.

27.  Sub-subparagraph 291-25.01(4)(b)(ii)(B) of the ITAR 1997 provides an exception to an amount being considered a concessional contribution where an amount is allocated from a reserve supporting the payment of an income stream where 'on the commutation of the income stream... the amount is allocated to the recipient of the income stream, to commence another income stream, as soon as practicable'.

28.  In regard to the commutation of the Lifetime pensions, subparagraph 1.06(6)(g) of the SISR states:

if, under the rules, the pension can be commuted - except if conversion is in relation to a commutation to pay a superannuation contributions surcharge, the conversion to a lump sum is limited to a sum that is not greater than the sum determined by applying the appropriate pension valuation factor under Schedule 1B to the pension as if the commencement day were the day on which the commutation occurs.

29.  Accordingly, an amount of a pension reserve (maintained to support the payment of a pension that meets the requirements under subregulation 1.06(6) of the SISR) that exceeds the maximum commutation amount of the pension cannot form part of the commutation lump sum.

30.  In this case, on the commutation of Lifetime pensions, the commutation amount of each pension, calculated by the Fund actuary, will be allocated to the member to commence an account based pension. This commutation amount is limited in accordance with paragraph 1.06(6)(g) of the SISR.

31.  Whilst it is expected that there will be an amount remaining in the reserve following the commutation of the flexi pensions, the pensions will cease at the time of commutation, and consequently, the reserve will no longer be a reserve being used solely to enable the Fund to discharge its liabilities in respect of the payment of those pensions.

32.  As it is our contention that following the commutation, the reserve from which any additional allocation is to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the ITAR 1997, the exception in that provision will not apply.

33.  Therefore, on the commutation of the Lifetime pensions, an amount that is equal to the maximum commutation value of the pensions will not count as the Member's concessional contribution if that amount is used to commence an account based pension as soon as practicable.

34.  However, the amount in the pension reserve which is in excess of the maximum commutation value of the pensions, will count as the Member's concessional contribution if that amount is allocated to the Member to immediately commence an account based pension for the Member.

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