Edited version of private advice

Authorisation Number: 1051731834033

Date of advice: 04 August 2020

Ruling

Subject: Allocation from a superannuation reserve to a member

Question 1

Will the allocation of an amount to a member in accordance with subregulation 291-25.01(4) of the Income Tax Assessment Act 1997 (ITAA 1997), from a reserve account which previously supported a pension, be a concessional contribution in accordance with section 291-25 of the ITAA 1997?

Answer

No. Provided the allocation is made in accordance with the exception in sub-paragraph 291.25.01(4)(a) of the ITAA 1997 it will not be a concessional contribution.

Question 2

Will an amount allocated to the member's account from the Fund's allocated earnings (which will not be allocated to the reserve) be included in the amount of the member's concessional contributions for the year in which the allocation is made?

Answer

No.

This ruling applies for the following period:

1 July 2020 to 30 June 2021

Relevant facts and circumstances

·         The Fund is a self-managed superannuation fund.

·         This ruling relates to a current member of the Fund.

·         The Fund has an unallocated reserve.

·         The reserve comprises assets formerly set aside to pay a commutable lifetime pension (flexi-pension) to a deceased member of the Fund.

·         Under the governing rules, the trustee is authorised to:

·         create and maintain reserves

·         debit or credit accounts as it sees appropriate

·         determine from time to time that a date is an Allocation Date

·         declare a Fund Earning Rate

·         on each Allocation Date, add to a member's account:

- any contributions for the member

- the Fund Earning Rate, and

- "any other amounts including allocating of reserves"

·         It is proposed that the trustee will enter into two schemes to manage the reserve.

·         Scheme 1: On a date before the conclusion of each income year, the trustee will allocate an amount from the reserve to the member, and to each other member. The amount allocated to each member will be not greater than 4.99% of the value of each member's interest in the Fund at the time of the allocation, and will be allocated amongst the members proportionately to the values of their respective member accounts in the Fund as at that date.

·         Scheme 2: Allocate earnings to members in proportion to the value of their interests in the fund, but not to the reserve.

·         As soon as practicable after the conclusion of each income year, the trustee will:

(a)  determine that 30 June of the relevant year is an Allocation Date;

(b)  declare a Fund Earning Rate calculated as follows:

(c)   add an amount of earnings to each member's account being the product of the member's weighted average balance since last Allocation Date and the Fund Earning Rate; and

(d)  add no amount to the reserve.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 291-25

Income Tax Assessment Regulations 1997 regulation 292-25.01

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

Superannuation Industry (Supervision) Regulations 1994 subregulation 5.03(2)

Superannuation Industry (Supervision) Regulations 1994 subregulation 5.04(2)

Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

Other relevant documents

ATOID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension'

Reasons for Decision

Detailed reasoning

1.    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) and each amount covered under subsection 291-25(3).

2.    Subsection 291-25(3) of the ITAA 1997 provides that concessional contributions for an income year also include certain amounts allocated for the individual in accordance with conditions specified in the regulations.

3.    Paragraph 292-25.01(4)(b) of the Income Tax Assessment Regulations 1997 (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:

(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; ...

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

5.    In ATO ID 2015/21 Superannuation ECT: concessional contributions - reserve (ATOID 2015/21), the Commissioner concluded that 'reserve' for the purposes of 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.

6.    The deceased member's flexi-pension was commuted as a death benefit.

7.    A pension meeting the requirements of subregulation 1.06(6) of the SISR may be commuted. Except for a limited prescribed purpose, the commutation amount is limited to a sum that is not greater than the amount determined by applying the appropriate pension valuation factor under Schedule 1B of the SISR to the pension, as if the commencement day were the day on which the commutation occurs.

8.    Accordingly, any amount in excess of the Schedule 1B amount that had been maintained to support the 1.06(6) pension, cannot form part of the commutation lump sum. To the extent that the rules of the Fund purport to provide otherwise, they will not meet the standards of 1.06(6) of the SISR.

9.    In commencing these pensions, a member essentially exchanges an amount of capital for certain rights - a right to receive an income stream, and a right for a certain amount to be returned in the event the pension is commuted.

10.  The amount that the member exchanges for these rights becomes an amount that is available to the trustee of the Fund, not the member, to satisfy the trustee's liability to pay the pension.

11.  The view in ATOID 2015/21 is reiterated in ATOID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension' (ATOID 2015/22). Whilst the view set out in ATO ID 2015/22 was in respect of a pension paid under subregulation 1.06(2) of the SISR, the view applies equally to pensions paid under subregulation 1.06(6). That is, the amount exchanged is an amount set aside to be used for a particular purpose.

12.  In this case an amount remained in the pension reserve after the commutation of the flexi-pension.

13.  Whilst there will be an amount remaining in a reserve following the commutation of the pension, the pension will cease at that time, and consequently, the reserve will not be a reserve used solely for the purpose of enabling the fund to discharge its pension liabilities.

14.  Subregulation 5.04(2) of the SISR sets out that for an accumulation fund, a member's minimum benefits are all the member's benefits in the fund. When a member exchanged the capital that was their superannuation interest for the right to be paid the pension under regulation 1.06(6), the pension then formed their minimum benefits. This included the limitation that only so much was payable as a commutation lump sum. Therefore, the Fund will not contravene the minimum benefit requirements where it commutes the pension in full and the amount above the maximum provided by Schedule 1B is left in a reserve.

Allocation from reserve

15.  Following the commutation of the pension, the trustee wishes to allocate the balance from the reserve account to all members of the Fund. The amount allocated to each member will be not greater than 4.99% of the value of each member's interest in the Fund at the time of the allocation, and will be allocated amongst the members proportionately to the values of their respective member accounts in the Fund as at that date

16.  As the reserve from which the allocation is to be made is not a reserve which meets the requirements of paragraph 292-25.01(4)(b) of the ITAR 1997, the exception in that provision to the allocation being a concessional contribution does not apply.

17.  Paragraph 292-25.01(4)(a) of the ITAR 1997 also provides an exception with respect to an allocation made from a reserve where the following conditions are met:

·         The amount is allocated in a fair and reasonable manner to an account for every member of the fund, and

·         The amount that is allocated for the financial year is less than 5% of the value of the member's interest in the fund at the time of allocation.

18.  The trustee has stated that the allocations to the members will be made on a yearly basis and be less than 5% of the members' respective account balances. This will be done in proportion to the respective member account. Based on this information the allocation to members will be in accordance with paragraph 292-25.01(4)(a) of the ITAR 1997. Subsequently, the allocation to the member's account will not be classed as concessional contributions.

Allocation of Fund earnings

19.  Subregulation 5.03(2) of the SISR provides that the trustee of a regulated superannuation fund must determine the investment return to be credited or debited to a member's benefit in a way that is fair and reasonable as between the members of the fund and the various kind of benefits of each member of the fund.

20.  An acceptable method would generally be to distribute profits to members in proportion to the value of their interests in the fund.

21.  It would be expected that any allocations to the reserve supporting a member's flexi-pension would be done in accordance with the Fund's governing rules and in a fair and reasonable manner.

22.  The governing rules of the Fund allow the trustee to maintain and to allocate earnings to a reserve as it sees appropriate. However, once the flexi-pension ceases, there is no member linked to the pension reserve, subsequently the trustee would not generally be justified in allocating earnings to the reserve as it no longer has the purpose of supporting a member's pension.

23.  An amount does not form part of a reserve unless it is allocated to the reserve by the trustee. A reserve has no rights or entitlements with respect to fund earnings as it is not a member or a legal entity. It is a creation of the trustee for a specific purpose.

24.  If follows therefore that the profits and earnings of the Fund do not form part of a reserve unless they are allocated by the trustee to the reserve - and in this case, there is no obligation on the trustee to make such an allocation.

25.  To refrain from allocating part of the profits and earnings of the Fund to the reserve is not to allocate an amount from a reserve to a member. Therefore, sub-regulation 291-25.01(4) of the ITAA 1997 will not include as concessional contributions any part of an amount allocated to the member's account from the Fund's earnings.

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