NTLG Superannuation Technical Sub-group minutes - 31 March 2008
Meeting details
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Venue: |
Australian Taxation Office, Narellan St, CANBERRA |
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Date: |
31 March 2008 |
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Start: |
2.00pm |
Finish: |
5.30pm |
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Chair: |
Cheryl-Lea Field |
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Contact and secretariat: |
Cindy Baker |
Contact phone: |
(02) 6216 2762 |
Attendees
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Cheryl-Lea Field (Chair) |
Tax Office |
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Cindy Baker (secretariat) |
Tax Office |
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Kylie Bryant (co-secretariat) |
Tax Office |
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Emma Haines |
Tax Office |
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Stuart Forsyth |
Tax Office |
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Jonathan Woodger |
Tax Office |
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Peter O'Reilly |
Tax Office |
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Andrew Lee |
Tax Office |
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Andrew Allen |
Tax Office |
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Gwen Miller |
Tax Office |
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Damian Byrnes |
Tax Office |
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Elliot Reich |
Tax Office |
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Hugh Elvy |
ICAA |
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Reece Agland |
NIA |
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Michael Davison |
CPA |
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Darren Wynen |
NTAA |
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Martin Heffron |
TIA |
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David Kettlestring |
ATMA |
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Paul Sarkis |
FPA |
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Robert Hodge |
ASFA |
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Daniel Caruso |
IFSA |
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David Shirlow |
IFSA |
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Robert Jeremiah |
SISFA |
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Darren Kingdon |
SISFA |
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Matt Battye |
SPAA |
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Michael Perry |
SPR Aust |
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Jennifer Batrouney S.C |
LCA |
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Helen Brady |
ABA |
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Kevin Dent |
APRA |
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Louise du-Pre |
ASIC |
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Alan Mallory |
Treasury |
Apologies
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Bruce Quiqley |
Tax Office |
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Kevin Fitzpatrick |
Tax Office |
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Andrew England |
Tax Office |
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Susan Orchard |
ICAA |
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Andrew Gardiner |
NTAA |
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Jason Duarte |
FPA |
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Tony Keir |
ASFA |
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Andrea Slattery |
SPAA |
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Merrie Hennessy |
APRA |
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Delia Rickard |
ASIC |
Professional bodies represented at the NTLG Superannuation Technical sub-group meeting
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Association of Superannuation Funds Australia |
ASFA |
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Association of Taxation and Management Accountants |
ATMA |
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Australian Bankers Association |
ABA |
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Australian Prudential Regulation Authority |
APRA |
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Australian Securities and Investment Commission |
ASIC |
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Australian Taxation Office |
Tax Office |
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CPA Australia |
CPA |
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Financial Planning Association |
FPA |
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Institute of Chartered Accountants Australia |
ICAA |
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Investment and Financial Services Association |
IFSA |
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Law Council of Australia |
LCA |
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National Institute of Accountants |
NIA |
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National Tax and Accountants Association |
NTAA |
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Self-Managed Super Fund Professionals' Association of Australia |
SPAA |
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Small Independent Superannuation Funds Australia |
SISFA |
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Strategic Public Relations Australia |
SPR Aust |
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Taxation Institute of Australia |
TIA |
[H2]Agenda items
Disclaimer
National Tax Liaison Group (NTLG) agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. The Commissioner of Taxation has instilled a more open philosophy and process with the NTLG. As such, minutes of NTLG meetings are published well before the meeting date on which members accept or modify the minutes under normal meeting protocols. This version of the minutes is available for member associations to share more widely on the understanding that formal endorsement is yet to occur.
Open and introductions
The Chair Cheryl-Lea Field opened the meeting. Committee members were welcomed and introduced.
The Chair apologised for Second Commissioner Bruce Quigley being unable to attend.
The Chair introduced and welcomed:
n Peter O'Reilly, Assistant Commissioner, Large Business and International (LB&I)
n Alan Mallory from Treasury
n Louise du-Pre from ASIC
n Helen Brady, who will now be representing the ABA
n Hugh Elvy, substituting for Susan Orchard (ICAA)
n Darren Wynen, substitute for Andrew Gardiner (NTAA)
n Paul Sarkis, substitute for Jason Duarte (FPA)
n Matt Battye, substitute for Andrea Slattery (SPAA)
n Darren Kingdon, additional SISFA representative, and
n Kevin Dent, substitute for Merrie Hennessy.
The agenda for the meeting was confirmed.
Acceptance of minutes
Minutes were accepted, subject to the comment below.
A member raised two issues in other business in the December 2007 meeting. The response to one issue was inadvertently omitted from the minutes. Please find below the response, and if no comments are received, the published minutes will be amended to include the comments below.
First, if a member provides a fund with a variation to the amount to be deducted and that variation results in the member exceeding their non-concessional contributions cap, is the fund required to return any part of the contribution? The other members suggested that they did not think regulation 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (SISR) works in that way.
Secondly, he raised a concern about the operation of the exclusion for certain capital gains tax amounts. The following material was submitted following the meeting.
Section 292-100 provides a separate $1 million capital gains tax (CGT) cap for certain non-concessional contributions from either the small business retirement exemption or the small business 15 year exemption. The contribution can generally be counted against the $1m CGT cap, provided that the contribution is made to a complying fund, and a choice in the approved form is made to apply the contribution against the cap.
In this regard, section 292-100(2)(a) provides that a contribution of all or part of the capital proceeds from a CGT event from which a capital gain was disregarded under section 152-105 (relating to 15 year exemption individuals) can potentially be counted against the CGT cap.
For companies and trusts that disregarded a capital gain under the 15 year exemption the following conditions must be satisfied:
Section 292-100(4). The requirement in this subsection is met if:
(a) just before a * CGT event, you were a * CGT concession stakeholder of an entity that could, under section 152-110, disregard any * capital gain arising from the CGT event (or would be able to do so, assuming that a capital gain arose from the event
(b) the entity makes a payment to you within two years after the CGT event
(c) the contribution is equal to all or part of your stakeholder's participation percentage (within the meaning of subsection 152-125(2)) of the * capital proceeds from the CGT event (but not exceeding the amount of the payment mentioned in paragraph (b)), and
(d) the contribution is made within 30 days after the payment mentioned in
paragraph (b).
Although section 292-100(4)(c) indicates that the exemption could apply to the stakeholders percentage of the capital proceeds , the amount is capped to the payment made by the entity within two years (refer section 292-100(4)(b)).
The payment amount (that is, for the purposes of the cap in section 292-100(4)(c)) to a CGT concession stakeholder is set out under section 152-125. In relation to a capital gain, the 'exempt amount' (that is, which can be paid out to the stakeholder under the two year rule in section 152-125 and be exempt from tax) is limited to the disregarded capital gain (refer to section 152-125(1)(a)(i). Therefore, it appears that section 292-100(4)(b) in many instances will restrict the non-concessional contribution that can be counted against the $1 million CGT cap to the stakeholder's percentage of the disregarded capital gain (and not the capital proceeds).
This appears contrary to situation for individuals (outlined above) and also contrary to the policy intent (refer to paragraph 1.104 of the Explanatory Memorandum (EM)) which states:
A CGT concession stakeholder of an entity that had a capital gain disregarded under Subdivision 152-B (or would have if certain conditions are met) is also entitled to use the CGT cap in the above instances. However, the entity must make a payment to that person within two years of the CGT event and that person must make a contribution within 30 days of that payment for the contribution to qualify for the CGT cap. The amount of the contribution is limited to the person's stakeholder's control percentage of the capital proceeds up to the CGT cap amount . (Emphasis added).
Tax Office response
Deduction notice variation issue
The Tax Office can only respond as administrator of self-managed superannuation funds. The Tax Office considers that the trustee of the fund does not need to return the contribution. There are two reasons for reaching this conclusion. First, it is possible to argue that the contribution remains one 'to which a valid and acknowledged notice under section 290-170 of the Income Tax Assessment Act 1997 (ITAA 1997)' relates notwithstanding a variation is subsequently lodged. The variation does not invalidate the earlier notice. Accordingly, the contribution is one that is excluded from the definition of fund capped contribution. Secondly, subregulation 7.04(3) is applied on a contribution by contribution basis. As such, the contribution, or part of it, would only be returned to the member if the undeducted part of a single contribution exceeded the cap.
CGT exclusion from non-concessional contributions issue
It is clear that the provision is meant to allow a contribution based on the capital proceeds rather than being limited to the amount that is a proportion of the exempt amount in section 152-125 of the ITAA 1997. If that were to be the case, the section could not operate in those cases where there is no actual capital gain.
However, in relation to the 15 year exemption (that is, the concession to which this agenda item relates) the Tax Office acknowledges that there may be some practical limits to the operation of the concession under Subdivision 152-B. Where there is no actual gain, or the amount released to the concession stakeholder under the 15 year exemption is based on the capital proceeds rather than the capital gain, there may be a question as to how the amount is treated in the hands of the concession stakeholder. For example, a payment of the proceeds by the company to the stakeholder may be treated as a dividend. A payment by a unit trust to a unit-holder may reduce the cost base of the units in the trust. The Tax Office raised these issues with Treasury during the drafting of the legislation.
Status of action items
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Action item: |
NTLGSPR040907/05
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Status: |
Closed
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Action item: |
NTLGSPR040907/08
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Status: |
Closed
Please refer to agenda item 9.4 - scenario 3 - crystallisation. How is the crystallised segment of a member's super interest calculated under section 307-225 of the ITAA 1997 in each of the following five scenarios? |
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Action item: |
NTLGSPR041207/02
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Status: |
Closed March meeting being held in Canberra.
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Action item: |
NTLGSPR041207/03
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Status: |
Closed
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Action item: |
NTLGSPR041207/04
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Status: |
Closed
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Action item: |
NTLGSPR041207/05
the Fitzgeralds case and the fact that there was insufficient evidence that the assets were assets of the SMSF the new residency rules, and the fact that they are used to test residency as of 1 July 2007, and the transfer of an existing life policy into a super fund and the implications of section 66. |
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Status: |
Closed from NTLG perspective
Referred to Superannuation Funds Segment team. |
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Action item: |
NTLGSPR041207/06
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Status: |
Closed
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Action item: |
NTLGSPR041207/07
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Status: |
Please refer to
agenda item 9.6
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Action item: |
NTLGSPR041207/08
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Status: |
Closed
For discussion at March 2008 meeting. Refer to agenda item 9.6 - total and permanent disability (TPD) premium deductions for superannuation funds. |
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Action item: |
NTLGSPR041207/09
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Status: |
Ongoing
Please refer to agenda item 10 for further information. A full discussion paper not yet available. |
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Action item: |
NTLGSPR041207/10
Members to provide any examples they may have to the NTLG mailbox. |
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Status: |
Closed
One example was contained in a letter received. This has been referred to Treasury as it related to a matter of policy. |
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Action item: |
NTLGSPR041207/11
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Status: |
Closed
Nil received. |
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Action item: |
NTLGSPR041207/12
Members to provide examples/interpretation of their views on instalment warrants. Based on examples received, the chair to hold an instalment warrant discussion with SPR Senior Executive and other interested members. |
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Status: |
Closed
Please refer to agenda item 8 . |
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Action item: |
NTLGSPR041207/14
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Status: |
Closed
Referred to Superannuation Consultative Committee (SCC) . |
Meeting discussion
At the December 2007 meeting members were asked to provide comments on various issues, very few responses were received. This was very disappointing. The Chair emphasised that we encourage feedback from members, as it assists and improves our interpretation of key industry issues.
Public Rulings, Practice Statements and ATO IDs
Provide members with an update of recently published and withdrawn rulings, Practice Statements and ATO ID's.
Public rulings and determinations
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Rulings program item |
Title (abbreviated) |
Status |
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SMSFD 2007/1
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When is a dividend or trust distribution received for the purposes of paragraph 71D(1) of the SISA |
Final Determination published 19 December 2007. |
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SMSFD 2008/1
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Scope of application of subregulation 13.22D(3) of the SISR |
Final Determination published 20 February 2008. |
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SMSFR 2007/D1
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The nature of the sole purpose test in section 62 of the SISA and incidental benefits |
Draft published on the 5 September 2007. Final version discussed at Superannuation Rulings Panel 13 and 14 March 2008. Final ruling due to be published June 2008. |
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SMSFR 2007/D2
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Giving financial assistance prohibited under paragraph 65 (1)(b) of the SISA |
Draft published on the 26 September 2007. Final version discussed at Superannuation Rulings Panel 13 and 14 March 2008. Final Ruling due to be published June 2008. |
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SMSFD 2007/D3
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Valuation of assets for in-house asset purposes |
Draft was published 19 December 2007. Final Determination is due for publication on the 16 April 2008. |
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SMSFR (Item 1981) |
Application of section 66 of the SISA to in specie contributions |
Draft ruling due to be published 2 April 2008. |
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SMSFR (Item 2225) |
Business real property in relation to self managed superannuation funds |
Draft due to be published April 2008 (exact date to be confirmed). |
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SMSFR 2008/D1
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Unpaid trust distributions |
Draft ruling published 19 March 2008. Comments are due 2 May 2008. |
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SMSFD (Item 2508) |
Death benefit nominations |
Draft discussed at 6 and 7 December 2007 Superannuation Rulings Panel. Draft being revised after industry consultation. |
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Ruling (Item 2506) |
Meaning of 'Australian superannuation fund' in subsection 295-95(2) of the ITAA 1997 |
Draft discussed at 28 and 29 February 2008 Income Tax Rulings Panel. Adjustments being made to accommodate panel comments. Draft due to issue for public comment 30 April 2008. |
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SGR 2007/D1
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Superannuation guarantee: payments made to professional sportspersons |
Draft ruling by 4 June 2008. Final ruling by 3 December 2008. |
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SMSFR (Item 2631) |
The meaning of 'borrow money' or 'maintain an existing borrowing of money for the purposes of section 67 of the SISA |
Draft ruling being prepared. Draft to be published in September 2008. |
Withdrawn ATO IDs
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Product |
Title/subject |
Date withdrawn |
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ATO ID 2002/1072 |
Income tax
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23 November 2007 |
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ATO ID 2002/1099 |
Income tax
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23 November 2007 |
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ATO ID 2002/1104 |
Income tax
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23 November 2007 |
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ATO ID 2002/1105 |
Income tax
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23 November 2007 |
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ATO ID 2002/1107 |
Income tax
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23 November 2007 |
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ATO ID 2001/754 |
Superannuation
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23 November 2007 |
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ATO ID 2001/768 |
Superannuation
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23 November 2007 |
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ATO ID 2002/88 |
Superannuation
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16 November 2007 |
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ATO ID 2002/89 |
Superannuation
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23 November 2007 |
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ATO ID 2002/90 |
Superannuation
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23 November 2007 |
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ATO ID 2002/91 |
Superannuation
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23 November 2007 |
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ATO ID 2002/349 |
Superannuation
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23 November 2007 |
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ATO ID 2002/433 |
Superannuation
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23 November 2007 |
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ATO ID 2002/717 |
Superannuation
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23 November 2007 |
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ATO ID 2002/723 |
Superannuation
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23 November 2007 |
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ATO ID 2002/1020 |
Income tax
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23 November 2007 |
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ATO ID 2007/145 |
Superannuation
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18 January 2008 |
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ATO ID 2002/763 |
Income tax
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1 February 2008 |
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ATO ID 2001/751 |
Income tax
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1 February 2008 |
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ATO ID 2002/155 |
Superannuation
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1 February 2008 |
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ATO ID 2002/588 |
Superannuation
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1 February 2008 |
Published ATO IDs
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Product |
Title/subject |
Date published |
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ATO ID 2008/15 |
Superannuation
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18 January 2008 |
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ATO ID 2008/18 |
Superannuation
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25 January 2008 |
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ATO ID 2008/17 |
Superannuation
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25 January 2008 |
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ATO ID 2007/225 |
Superannuation
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21 December 2007 |
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ATO ID 2008/25 |
Superannuation
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8 February 2008 |
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ATO ID 2008/26 |
Superannuation
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8 February 2008 |
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ATO ID 2008/27 |
Superannuation
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8 February 2008 |
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ATO ID 2008/28 |
Superannuation
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8 February 2008 |
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ATO ID 2008/11 |
Superannuation
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11 January 2008 |
Meeting discussion
The Chair explained that this was a comprehensive list of published and withdrawn public rulings, Practice Statements and ATO IDs, since the last NTLG Superannuation (SPR) Technical Sub-group meeting in December 2007. Members were provided with an advance copy of the draft 'in specie' contribution SMSF ruling which was to be published on 2 April 2008.
Members were happy with the list, and no further comments were received.
Superannuation interest
n Following discussions from the last NTLG Superannuation Technical Sub-group meeting held in December, a fact sheet has been published How many superannuation interests does a member of a superannuation fund have in their fund?
n What else needs to be done in this area?
How many superannuation interests does a member of a superannuation fund have in their fund?
A 'superannuation interest' is defined, relevantly for present purposes, as 'an interest in a superannuation fund 1 '. When read in context, the Commissioner considers that this definition generally refers to the rights of persons who have proprietary interests in trusts, interests under a trust that confer no proprietary interest in the assets of the trust, purely contractual rights (for example to a right to an annuity) and statutory rights to superannuation benefits.
Accordingly, 'interest in' a fund refers to a distinct claim of any kind against a fund, whether it be proprietary in character or not. However, various regulations made under the income tax law modify this general principle by creating special rules for what constitutes a superannuation interest 2 .
Against this background, the following sets out the Commissioner's view as to what constitutes a superannuation interest in relation to the different kinds of superannuation fund.
This document deals only with superannuation funds and not with approved deposit funds, retirement savings accounts or superannuation annuities.
Self managed superannuation funds
An amount that supports a superannuation income stream that is commenced from an SMSF is treated as a separate interest from immediately after the income stream commences (that is, once its tax free component and taxable component proportions have been determined 3 ). In the case of multiple income streams commenced from the same SMSF, each income stream commenced gives rise to a separate interest from the interest to which each other income stream gives rise.
Except for that case, a member of an SMSF always has just one interest in the SMSF 4 .
Funds with four or fewer members that are not SMSFs (that is, 'small APRA funds') are not in the same category as SMSFs 5 . They are covered by the next category.
Superannuation funds other than SMSFs and public sector superannuation schemes
An amount that supports a superannuation income stream that is commenced from a fund of this kind is treated as a separate interest from immediately after the income stream commences (that is, once its tax free component and taxable component proportions have been determined 6 ). In the case of multiple income streams commenced from the same fund, each income stream commenced gives rise to a separate interest from the interest to which each other income stream gives rise.
Except for that case, it is a question of fact whether the various amounts, benefits and entitlements that a member has in a fund constitute one interest or several interests in the fund. The principle described in the second paragraph above should be applied in addressing that question.
If a member has separate accounts in a fund, the Commissioner accepts that an account constitutes a separate interest so long as, viewed as an objective matter, the account reflects a claim of the kind described in the second paragraph above that is separate and distinct from other claims of that kind that the member has against the fund. For example, if the member has bought separate 'products' under a separately documented process whereby the member acquires distinct sets of legal rights against the trustee.
By contrast, merely purporting to divide a member's entitlements into separate accounts as a bookkeeping exercise, such as the separate bookkeeping for investments against which a person had a single claim, without any such objective basis does not establish that there are separate interests.
Public sector superannuation schemes (including constitutionally protected funds)
The same principles as in the previous section apply. However, for many public sector superannuation schemes (PSSS) the source of the various rights and obligations of scheme members is the legislation establishing the PSSS rather than a trust deed or a contract. An objective basis for discerning separate interests in the one scheme is likely therefore to be found in the relevant legislation than in any equitable or contractual relationship between trustee and member.
There is one extra rule 7 . If a benefit is partly sourced from contributions to the scheme and earnings on those contributions and partly from some other source, the member's interest is separated into two interests: one interest that consists of the contributions to the scheme and the earnings on those contributions; and one interest consisting of the remainder of the interest. (For this purpose the 'contributions and earnings' are reduced by the amount specified in any notice given under section 307-285 for the benefit.)
Anti-avoidance
Nothing in this document should be read as precluding the normal operation of the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936). The creation or manipulation of separate superannuation interests by way of blatant, artificial or contrived arrangements for the sole or dominant purpose of obtaining a tax benefit may attract the operation of Part IVA. This would have consequences for the taxpayer who obtains the tax benefit, being the relevant member in this case 8 . Practice Statement PS LA 2005/24 explains how the Commissioner interprets and administers Part IVA.
1See the definition of ' superannuation interest ' in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
2See Division 307 of the Income Tax Assessment Regulations 1997 (ITAR 1997).
3See regulation 307-200.05 of the ITAR.
4See regulation 307-200.02 of the ITAR.
5Regulation 307-200.02 of the ITAR applies only to SMSFs and not to any other kind of fund.
6See regulation 307-200.05 of the ITAR.
7See regulation 307-200.03 of the ITAR.
8The operation of Part IVA in relation to a scheme of this kind would not have direct consequences for a fund trustee unless the trustee obtained some tax benefit from the scheme. However, a person who markets or otherwise encourages the growth of a tax avoidance scheme in return for consideration may be penalised separately: see Division 290 of Schedule 1 to the Taxation Administration Act 1953.
Meeting discussion
The superannuation interest web content was published 25 February 2008.
The Chair asked members the following questions.
n What is the priority with super interest?
n Are members happy with fact sheet as it is?
n Do we need to convert it into a formal public ruling?
n What else do we need to do?
The IFSA representative wanted to go back to members to confirm that all the issues raised in IFSA's December 2007 letter to the Tax Office had been addressed.
AFSA had no adverse feedback and found the fact sheet acceptable, and welcomed the statement about the application of the anti-avoidance provisions. The ASFA representative believed a formal ruling would provide absolute certainty, but the superannuation industry should be happy to operate on the basis of web content while there are higher priority issues.
The SISFA representative believed the fact sheet's statement about the application of the anti-avoidance provisions is sufficient as it makes it clear that the member is the person who carries the liability. The representative suggested there could be some guidance for SMSF members and trustees about the partial commutation of superannuation pensions in order to contribute an amount back to the accumulation phase. Consideration could also be given to adding some examples that illustrate the crystallised proportioning rule.
Outcome
Consensus was the fact sheet was enough for the moment. The Tax Office should determine the priority for proceeding with the preparation of a ruling as part of its normal rulings process.
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Action item: |
NTLGSPR310308/1
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Status: |
Members to provide further examples to assist with a superannuation interest ruling. Submissions by 19 May 2008. Email NTLG secretariat: NTLGSPRSubcommittee@ato.gov.au |
CGT rollover rules
Extension of the CGT rollover rules on marriage breakdown to small super funds
The Tax Office seeks input of the members on the changes to the CGT rollover rules on marriage breakdown included in Tax Laws Amendment (2007 Measures No. 5) Act 2007. We particularly seek your input on:
n what level of information and guidance to support these changes is required? (the changes have already been communicated in SMSF Newsletter edition 3)
n whether any common issues have emerged already that should be addressed in any Tax Office information and guidance, and
n developing some real life examples to use in any information and guidance material.
Background
Changes to the tax law relating to the capital gains tax (CGT) for marriage breakdown rollovers, for small super funds, received royal assent on 25 September 2007. The amendments apply to CGT events that happen on or after 1 July 2007.
One spouse in a marriage breakdown can transfer their entire interest in a CGT asset in a small super fund (for example, a SMSF), to another complying super fund, without an immediate CGT taxing point.
The amendment has been made because it is often in the interests of spouses in a marriage breakdown not to continue to provide for their future super arrangements through a single small fund. The amendment also provides greater choice of funds to the spouse whose interest is transferred.
Previously, the CGT rollover for assets of small super funds on marriage breakdowns, applied only to the:
n spouse who benefited from a payment split made under the Family Law Act 1975, and
n assets subject to the payment split.
These assets could only be rolled over to another small super fund.
The previous rollover rules did not recognise that the spouse who benefited from the payment split may have made their own personal contributions to the fund.
The amendments enable a CGT rollover on a marriage breakdown for a transfer of any CGT asset, reflecting the personal super interest of either spouse (but not both). This must be from a small super fund to another complying super fund under specific conditions.
The CGT marriage breakdown rollover will be available to the trustee of the small super fund who made the transfer of the super interest. However, the trustee must transfer all of the assets reflecting the personal super interest of the transferor spouse. In addition, once the trustee has obtained a CGT rollover for the benefit of either spouse, the rollover is no longer available for a transfer of any asset reflecting the personal super interest of the other spouse. The accrued capital gain or capital loss is deferred until a subsequent CGT event happens to an asset that has been transferred. The amendments apply to CGT events that happen on or after 1 July 2007.
Meeting discussion
Emma Haines, Assistant Commissioner Superannuation, explained the background on marriage breakdown and notified members that this was published in SMSF news in 2007.
Various members believed that it was a positive change and that it made perfect sense. The TIA representative suggested that as trustees and members would normally obtain legal advice in this context, it should not be necessary for the Tax Office to publish further information.
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Action item: |
NTLGSPR310308/2
Members were asked if the Tax Office needs to do more? |
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Status: |
Members to notify secretariat if they believe more work is needed on this and provide further examples. Submissions by 19 May 2008. Email NTLG secretariat: NTLGSPRSubcommittee@ato.gov.au |
Litigation update
n Provide members with an update on recent cases of significance.
A Taxpayer v Commissioner of Taxation, 2008 AATA 64 (24 January 2008)
This case dealt with a termination payment which included an amount paid for termination of the taxpayer's Australian service, foreign service and a repatriation allowance.
The taxpayer received an ETP relating to the financial year ended 30 June 2003 as part of a redundancy payment. There were two main issues. The first concerned whether the redundancy payment was an exempt non-resident foreign termination payment according to section 27CD of the ITAA 1936. The second issue concerned whether the repatriation allowance was assessable as income according to ordinary concepts, as a bona fide redundancy payment or whether it was exempt under section 23AG or 23L (because it comprised fringe benefit).
The tribunal affirmed the Commissioner's decision with respect to the first issue and held that for the ETP to be an exempt non-resident foreign termination payment, the payment had satisfy all four requirements set out in the definition at section 27A(1)(a). The payment met three of the requirements, but did not meet the requirement that it relate 'solely to a period of the employment during which the taxpayer was not a resident of Australia'. It was therefore not an exempt non-resident foreign termination payment. It was also held that the payment could not be apportioned.
The tribunal varied the Commissioner's decision with respect to the second issue and held that the repatriation allowance was a component of the bona fide redundancy payment and was therefore assessable as an ETP under the provisions in Part III, Division 2 Subdivision AA of the ITAA 1936.
The decision is now subject to an appeal.
Meeting discussion
Emma Haines, Assistant Commissioner, Superannuation talked members through the recent litigation case, and told members the taxpayer has appealed the case.
Members were told that the Tax Office is expecting several appeals to the Administrative Appeals Tribunal (AAT) about special income to be heard soon.
Instalment Warrants Report
Instalment Warrants Report on out-of-session discussion
n Provide members with an update on out-of-session technical discussions.
Background
At the 4 December 2007 meeting of the NTLG Superannuation Technical Sub-group it was agreed that an out-of-session technical discussion take place in relation to super funds entering into instalment warrant type arrangements.
A large number of members of the sub-group nominated themselves or others to participate in the proposed technical discussion to be held by way of a teleconference. Consequently, it was decided to invite a smaller group drawn from those who nominated to participate in the teleconference technical discussion with relevant officers from the Tax Office.
The teleconference was held on 14 February 2008 with discussions being focussed on issues identified concerning the relationship of subsection 67(4A) of SISA with the investment and borrowing restrictions imposed within the regulatory regime of SISA and SISR. Income tax issues were not to be considered.
A number of issues were discussed at the teleconference. Some of these issues have been resolved and the Tax Office can provide advice through the publishing of a question and answer (Q&A) document. There are some remaining issues, to be identified in the Q&A, for which the Tax Office is not presently in a position to provide advice. The Tax Office is now working on providing formal ATO view on these issues.
A draft version of the Q&A (attached) was provided for comment by NTLG Superannuation Technical Sub-group members, prior to the final version being published.
Meeting discussion
The Chair advised members of the work that had taken place out of session on instalment warrants and thanked members for their contributions. The Chair discussed aspects of the draft Q&A, and advised Stuart Forsyth and herself had attended the main NTLG on 26 March 2008 to discuss its contents. The outcome of the main NTLG meeting was that the Commissioner wanted the Q&A published as soon as possible in conjunction with a Taxpayer Alert.
The Taxpayer Alert was to focus on those aspects of the instalment warrant arrangements that were of most concern, being:
n borrowing in relation to an asset already held by the fund
n non-commercial interest rates, for example if no interest is charged or the rate charged is substantially higher than a commercial rate, and
n personal guarantees provided by members or trustees effectively mean that the loan cannot be characterised as a non-recourse loan.
Stuart Forsyth explained that the Tax Office is only ever asked to review a small percentage of these new products. As such, he asked members whether they were aware of any other questions the Tax Office may need to answer.
Overall the members were happy with the Q&A document, seeking further clarity on some issues. The members also made the following suggestions and comments.
n The guarantee issue needs to be clarified. It was suggested that a guarantee should be acceptable if the guarantor's right of indemnity from the fund couldn't exceed the right of recourse over the asset that is the subject of the warrant.
n It was noted that a number of financiers don't appear to want to write a non-recourse loan without the added security of personal guarantees. Further, the existence of a personal guarantee usually ensures the interest rate charged on the loan is lower.
n It was also reported that one major product had an issue with personal guarantees, and may have since been with drawn. It should also address the situation where there is no security at all. In that case, the Tax Office should clarify whether there is a contribution in the event of a default in repaying the loan.
n Clarification is needed as to when an asset will be a replacement asset. For example, will it be acceptable if a borrowing is used to purchase a particular parcel of shares, but the trustee later decides to realise that particular investment and use the proceeds of sale to purchase shares in another company. Will that be a replacement asset?
n What if borrowing to buy a property with the intention of refurbishing or improving it - is that still a borrowing to acquire an asset?
n What if borrowing to buy land with the intention of developing it? The Tax Office commented that broader questions, such as the application of the sole purpose test arise out of this sort of scenario.
n It was also suggested that where shares are involved, it may be necessary to consider the impact of dividend reinvestment arrangements. For example, would it matter that the shares acquired under the reinvestment are also available to the lender under the security arrangements?
One representative association will provide a list of questions that need to be addressed, for example what does 'maintain a borrowing' mean.
The Tax Office advised that it is developing a ruling on the operation of section 67 more generally and that the meaning of that expression will be addressed in that work rather than only in relation to instalment warrants.
The Tax Office suggested that the use of replacement asset was meant to cover situations like mergers and takeovers where there is a change in the asset due to circumstances beyond the trustee's control. However, it is necessary to consider the actual words of the legislation to determine their scope and that this is an issue that will require further consideration.
The Tax Office asked whether interest capitalisation is a significant issue.
The members made the following comments:
n all loan agreements would include a standard clause allowing interest to be capitalised in the event of a default in repaying the loan, so if capitalisation is not allowable it will be a significant issue
n capitalisation of interest raised the question whether there is a further borrowing that has not been used to acquire an asset, and
n it is concerning that real estate agents and others have picked up on the instalment warrant changes and are encouraging their use in selling real estate. It was suggested that the Tax Office should publish something reminding trustees of the limits on investments.
The Tax Office agreed that it was important to remind trustees that they must be very careful about which assets they put into the instalment warrant arrangement. It must be an asset that the SMSF could have acquired directly. It was also agreed that trustees should be reminded (a checklist may be appropriate) of some of their basic obligations, such as to ensure that:
n the trust deed or fund rules allow the trustee to borrow
n the investment fits the fund's investment strategy, and
n the fund has the cash flow to meet the repayment obligations.
Members asked for the ASIC's views, particularly in relation to the role of real estate agents in promoting the use of instalment arrangements by self managed superannuation funds.
ASIC said they have commenced work in this area, and noted that it would definitely be concerned if financial advice were being offered by people who are not licensed investment advisers. However, ASIC noted that it has been suggested that the nature of the arrangement may not be a financial product, for example, because it is simply a purchase by instalments that might fall within the credit exemption and they are looking further at this aspect.
Some final points raised included whether line of credit and split loan arrangements are within the scope of the instalment warrant arrangements and whether the borrowing could also cover the transactions costs such as stamp duty and so on.
Post meeting action
The following material was published to the Tax Office's website on Friday 4 April 2008.
Taxpayer Alert TA 2008/5 Certain borrowings by self managed superannuation funds
An email was sent to all members on the 4 April 2008.
Technical issues raised by members
The Chair re-emphasised the need for detailed information to be provided in the issues template and in particular a technical analysis of the issues submitted including an explanation of reasons for the industry view. This will assist our technical officers in forming a considered view. In some instances we are having to guess what the members are asking and are unable to determine the basis for the industry view, a paragraph is not enough.
The Chair informed members if we do not receive fully completed templates we will not be accepting the questions. Some issue templates submitted for this meeting will in the future will be returned.
Concessional contributions cap
Concessional contributions cap - employer paid insurance premiums
Issue raised
n Under what circumstances are insurance premiums paid by an employer, or by a fund, to provide additional superannuation benefits to employees/members to be reported by the superannuation fund as a concessional contribution?
n How is the amount attributable to the member to be calculated?
Background information
In most superannuation funds, insurance premiums in respect of additional member benefits are deducted from the member's account. However, in some funds, the cost of the insurance is met by the sponsoring employer.
It has been suggested in the media and elsewhere that the Tax Office has formed a view that in certain circumstances insurance premiums paid on behalf of a fund member are to be reported to the Tax Office a concessional contribution in respect of the individual.
The payments may be made by way of:
n direct payment of the policy premium by the employer
n payment of the premium out of the corpus of the trust without direct attribution to a member account, or
n payment of the premium out of the fund surplus (generally applicable to defined benefit funds).
Industry view/suggested treatment
Inclusion of these amounts will create significant administrative difficulties for the superannuation industry.
Technical references
Section 292-25 ITAA 1997 (definition of concessional contribution).
Impact on clients
Superannuation funds and their administrators need certainty on this matter.
While the revenue impact is probably minimal, there is scope for the concessional contributions cap to be circumvented (a system integrity issue).
There is a potential equity issue between members.
Priority of issue where ATO view is required
High.
The industry requires certainty so that a consistent treatment can be applied across the industry. If employer paid contributions are to be reported then considerable systems work will need to be undertaken to enable the October 2008 reporting deadline to be met.
Tax Office preliminary view
n Concessional contributions cap - employer paid insurance premiums.
Employer paid expense
The Tax Office view on the taxation treatment of expenses of a superannuation fund paid by an employer is set out in Miscellaneous Taxation Ruling MT 2005/1. The ruling explains the circumstances in which payment by an employer or member of a fund's expense may amount to a superannuation contribution.
Paragraphs 14 and 15 of MT 2005/1 state that the Tax Office's preferred approach is for all superannuation fund expenses to be paid directly out of the fund itself and for superannuation contributions to be made to the fund. However the Tax Office recognises that the practice of an employer paying a fund expense is common. This is usually done for administrative ease, for example, where the fund does not have a cheque account.
The views expressed in MT 2005/1 are also relevant to the provisions of the ITAA 1997.
Where an insurance policy premium is paid directly by the employer on behalf of the super fund the amount will count as a contribution to the fund. Such contributions will be deductible contributions to the extent to which the employer is able to show that the payment is for the purposes of making provision for superannuation benefits for a particular employee, or group of employees. For accumulation interests in a fund, such contributions would have to be attributed to the member's account, or group of members' accounts, and reported by the fund for contributions cap purposes. In addition regulation 7.08 of the SISR requires the contribution to be allocated to a member of the fund.
As the amount is required to be allocated to members' accounts under SISR, the amount allocated to each member's account would be the amount to be reported for the purposes of excess contributions tax.
From an income tax perspective, it would be reasonable to allocate the contribution in the same way as the expense would have been allocated to each member under regulation 5.08 of the SISR had the expense been paid by the fund.
Fund meets expense from corpus
Where a policy premium is paid out of the corpus of the trust without direct attribution to a member account and the policy premium is not funded from a contribution made to the fund, there is no requirement to attribute any amount to member's accounts. No amount needs to be reported for the purposes of the contribution caps.
Fund meets expense from surplus
The third scenario provided in the question is that the fund pays the premium out of the fund surplus which is said to be generally applicable to defined benefits funds.
Under section 292-165 of the ITAA 1997, if a person has a defined benefit interest, the amount of their concessional contributions is the sum of the concessional contributions relating to an accumulation interest and their notional taxed contributions in respect of the defined benefit interest. The amount of a member's notional taxed contributions is determined using the method in the ITAR 1997.
Where a defined benefit fund pays an insurance premium out of the fund surplus in respect of members who hold a defined benefit interest in the fund, no amount additional to the notional taxed contributions will be required to be reported for the member in respect of the defined benefit interest for the purposes of the excess concessional contributions cap.
Meeting discussion
The Tax Office suggested the first part of the Tax Office preliminary view was straight forward but wanted the members' views as to the accuracy of the second and third parts, particularly as there does not appear to common understanding of the use of the terms reserves and surplus. If 'reserve' and 'surplus' were given the broadest possible meaning of any amount not allocated to a member's account it would be possible for an expense paid out of fund earnings to be caught by the income tax Regulation 292-25.01.
ASFA advised that the response answered the client's needs.
There was further discussion of the regulation and scope it should be given. Several members suggested that it should really be applied in circumstances where amounts were allocated out of historic reserves (that is, those created before the allocation rules of the SISR were established).
One member thought that the approach seems appropriate, but the purpose of subregulation 292-25.01(5) of the Income Tax Assessment Regulations is not as clear. It could be read as suggesting that were an employer to contribute money to the fund and the insurance premium were paid from that contribution then even a fair and reasonable allocation out of profits would be captured by the subregulation 292-25.01(4).
Following further discussion of this matter, the Tax Office undertook to consider the matter further before finalising the responses for sub-questions 2 and 3. Input is required on how the terms reserve and surplus are used in the industry.
Following the meeting, ASFA provided further details of the request. However, the request related the affairs of a specific taxpayer and will not be addressed via this forum.
The Tax Office will reconsider the answer should the member provide some examples of the use of reserves and surpluses for both accumulation and defined benefit funds.
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Action item: |
NTLGSPR310308/3
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Status: |
Members to provide some examples of the use of reserves and surpluses for both accumulation and defined benefit funds, to enable the Tax Office to consider this matter further. Submissions by 19 May 2008.
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No TFN tax
No TFN tax - defined benefit fund members with a defined benefit interest
Issue raised
n Can section 95-610 of the ITAA 1997 be applied in respect of a contributions made by an employer sponsor to a defined benefit fund for the purpose of funding liabilities in respect of members with a defined benefit?
Background information
In a defined contribution (sic) fund, employers make contributions of specific amounts for specific members.
However, the funding arrangement in respect of defined benefit interests is that the employer contributes to ensure that the pool of funds backing the total interests of the fund members is sufficient to meet current potential liabilities of the scheme.
In the context of contribution caps, this has required the concept of 'notional contributions' to be developed in respect of defined benefit fund members with a defined benefit interest.
The use of the singular in section 295-610(1)(b) (it is a contribution made to the fund or *retirement savings account (RSA) on or after 1 July 2007 to provide *superannuation benefits for an individual) suggests that the provision applies only to contributions made where a specific individual is the target of the contribution.
Industry view/suggested treatment
It is suggested that provided there is more than one member of the fund with a defined benefit interest then the no-TFN tax provisions cannot be applied in respect of contributions made by an employer to fund the benefits of a defined benefit member with a defined benefit interest who has not quoted their tax file number (TFN).
However, a salary sacrifice contribution made by the employer in respect of such a member would be subject to the no-TFN tax provisions.
Technical references
Subdivision 295-I ITAA 1977
Impact on clients
All defined benefit funds would be affected. The revenue impact would be minimal, and considerably less than the cost of funds implementing systems to manage the liability.
Priority of issue where Tax Office view is required
High.
This is high priority as administration and IT systems will need to be designed to calculate and manage the tax liability (as, unlike an accumulation scheme, the tax cannot be deducted from the member account).
Tax office preliminary view
n Can section 295-610 of the ITAA 1997 be applied in respect of a contributions made by an employer sponsor to a defined benefit fund for the purpose of funding liabilities in respect of members with a defined benefit?
While the wording of paragraph 295-610(1)(b) of the ITAA 1997 is written in the singular form, the Tax Office interprets this provision as applying to both singular and plural scenarios.
To this extent, paragraph 295-610(1)(b) applies to defined benefit funds, meaning that such funds may be in receipt of no-TFN contributions income.
Paragraph 23(b) of the Acts Interpretation Act 1901 explains that in any Act, unless the contrary intention appears:
words in the singular number include the plural and words in the plural number include the singular.
The ATO view is that there is no contrary intention contained in subsection 295-610(1) to suggest it applies in the singular form only. In this regard, there is consistency between the interpretation of section 295-610 and that of section 290-60, also written in the singular, which provides a tax deduction for employer superannuation contributions - including those made to defined benefit funds.
The Tax Office has asked Treasury whether they would recommend the government amend to the law given the difficulties industry representatives have said arise in applying section 295-610 to defined benefit funds.
In the absence of an amendment, where a defined benefit fund has members who accrue benefits for the financial year and who have not quoted their TFN to the fund, the Tax Office will accept a reasonable method of calculating the amount of the no-TFN contributions income for the year. Contributions income attributable to particular members, such as salary sacrifice contributions, can be determined to be no TFN contributions income without difficulty. However contributions which are not attributable to a particular member will need to be apportioned across all members of the fund on a reasonable basis.
Without limiting acceptable methods, an example of apportionment of the contributions income could be based on the superannuation salaries of the members who have accrued benefits in the financial year. Another acceptable method of apportionment would be to use the amount of the members' notional taxed contributions which is required to be calculated for defined benefit members for the purpose of the excess contributions tax. To illustrate this with a simple example:
A defined benefit fund has 10 members who have accrued benefits in the financial year. One member, Mr X, has not quoted his TFN. The fund receives $100,000 contributions income for the financial year. The fund calculates the 10 members' notional taxed contributions for the financial year for the purposes of the excess contributions tax. The total of all of the 10 members' notional taxed contributions is equal to $140,000. Mr X's notional taxed contributions are $7,000. The funds no TFN contributions income is calculated as $7,000/$140,000 x $100,000 = $5,000.
Meeting discussion
It was agreed this is a matter of policy to be considered by Treasury and the government.
Overseas transfers
Issue raised
Overseas transfers
n Was the change in the method of calculating the taxable income for foreign transfers intended?
Background information
n If you receive a lump sum payment from a foreign superannuation fund the 'applicable fund earnings' are taxable income to the fund.
n Applicable fund earnings includes the proportions of the total days in the period in which the lump sum accrued that the taxpayer was a resident in Australia over the total days in the period in which the lump sum accrued.
This method of calculating taxable income reduces the amount of taxable income generated from the overseas payment but increases the amount that gets assessed against the taxpayer's non-concessional cap if the amount is rolled over into an Australian superannuation fund.
Industry view/suggested treatment
If our interpretation is correct this change needs to be clearly communicated to ensure compliance with the ITAA 97.
Technical references
Section 305-75(3) defines applicable fund earnings as:
n the total amount vested in the foreign superannuation fund on the day the lump sum is paid, less
n the vested amount in the foreign fund just before the taxpayer become an Australian resident, plus
n any contributions made into the foreign fund after the taxpayer became an Australian resident, plus
n any rollovers made into the foreign fund from other foreign funds after the taxpayer became an Australian resident' multiplied by
n the proportion of the total days in the period in which the lump sum accrued that the taxpayer was a resident in Australia over the total days in the period in which the lump sum had accrued.
Impact on clients
Reduces the amount that the member can transfer into an Australian superannuation fund.
Tax office preliminary view
n Was the change in the method of calculating the taxable income for foreign transfers intended?
It is recognised that the wording of section 305-75(3) of the ITAA 1997 is not as clearly expressed as under the former section 27CAA of the ITAA 1936, which it replaced. A literal interpretation of the wording may lead to different amount of assessable earnings being calculated under the two sections.
Section 1-3 of the ITAA 1997 may apply to interpret a rewritten provision that expresses the same idea as a former provision. Section 305-75(3) describes the formula in the former section 27CAA in words and is intended to calculate the same amount. However, paragraph (c) is ambiguous in its description of the period against which the period of residence is to be apportioned against.
The Explanatory Memorandum (EM) states that the existing tax treatment of benefits paid from foreign superannuation funds was maintained between the old and new laws.
As such, the Tax Office has expressed the opinion that the law has not changed - see for example our edited versions of several private binding rulings, including authorisation number 75054.
However, as the wording of the legislation is unclear, we will add this provision to a list of technical corrections to be referred to Treasury. They may recommend to government an amendment to the law if they consider it appropriate.
Meeting discussion
Several members were firmly convinced that the law was clear but wrong when compared with the old law and that an amendment is required.
It was also suggested that the law may also be defective in another situation. The rewritten law will not achieve the correct outcome where a person chooses to transfer money from an overseas fund so that part is transferred to an Australian fund and part to another overseas fund.
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Action item: |
NTLGSPR310308/4
Tax Office to raise this matter with Treasury. |
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Status: |
Tax Office to raise this matter with Treasury. |
Crystallisation
How is the crystallised segment of a member's super interest calculated under section 307-225 of the ITAA 1997 in each of the following 5 scenarios?
Scenario 1 - Bank transfers
Due to the rise in internet banking a number of clients have requested a transfer from a personal account to the superannuation fund on 29 or 30 June. As this fell on a weekend the transaction would be finalised on the next processing date. That is:
n debit reflected in personal account on 30 June 2007, and
n credit reflected in superannuation account on 1 July 2007.
Scenario 2 - Bank transfers
Written request to transfer monies sent to the adviser or cash management trust (CMT) 25 June or during this week. Due to delays in mail or demand for transactions at the provider the transaction is not processed until the following week. That is:
n debit reflected in CMT subsequent to 30 June 2007, and
n credit reflected in superannuation fund (SF) subsequent to 30 June 2007.
Scenario 3 - In-specie contributions
Due to the volume of transactions at year end a number of off market transfer documents were received by share registries but not processed in a timely manner. While most transactions were processed with effect of the date received. Some clients had completed the wrong form, that is broker sponsored form for issuer sponsored holdings or visa versa. The share registry did not identify this until the transaction was to be processed and returned the forms and requested these be resubmitted on the correct form. The transaction is processed when the correct form is presented. That is:
n form receipted by the registry 27 June 2007
n form returned to the member 1 August 2007
n forms corrected and returned 14 August 2007, and
n forms processed 21 August 2007.
Scenario 4 - Rollovers and transfers
Due to the volume of transactions at year end a number of superannuation funds were unable to process rollovers in a timely manner. A review of the documentation reveals that the rollover payment notification (ROPN) is dated 28 June 2007 although the transaction was not processed until 28 July when the cash was received by the fund. That is:
n request for rollover June 2007, and
n request processed and documentation provided to the recipient fund 28 July 2007
Scenario 5 - Rollovers and transfers
Due to the volume of transactions at year end a number of superannuation funds were unable to process rollovers in a timely manner. A review of the documentation reveals that the ROPN is dated 5 July 2007 although the transaction was requested prior to 30 June 2007 . That is:
n request for rollover June 2007, and
n request processed and documentation provided to the recipient fund 5 July 2007.
What is your preliminary view?
Fundamentally, each scenario can be addressed by considering the following question:
Did the contribution or transferred amount exist as part of the value of the member's super interest just before 1 July 2007 for the purposes of working out the crystallised segment under section 307-225?
Tax office preliminary view
How is the crystallised segment of a member's super interest calculated under section 307-225 of the ITAA 1997 in each of the following 5 scenarios? - (Assume the member has an accumulation interest in each scenario.)
Scenario 1 - Bank transfers
Due to the rise in internet banking a number of clients have requested a transfer from a personal account to the superannuation fund on 29 or 30 June. As this fell on a weekend the transaction would be finalised on the next processing date. That is:
n debit reflected in personal account on 30 June 2007, and
n credit reflected in superannuation account on 1 July 2007.
Tax Office response
A contribution is made to a fund when it is received by the fund.
As the contribution is received after 30 June 2007, it cannot form part of the member's super interest before 1 July 2007 and will not form part of the crystallised segment for that interest.
Instead, the contribution would be caught under section 307-220 in working out the contribution segment of the member's super interest.
Scenario 2 - Bank transfers
Written request to transfer monies sent to the adviser or CMT 25 June or during this week. Due to delays in mail or demand for transactions at the provider the transaction is not processed until the following week. That is:
n debit reflected in CMT subsequent to 30 June 2007, and
n credit reflected in SF subsequent to 30 June 2007
Tax Office response - The answer is the same as scenario 1
Where an amount is requested to be transferred (via direct debit or otherwise) before 1 July 2007, but the transaction is not processed/finalised until on or after 1 July 2007, the value of the member's super interest will not include the transferred amount in working out the crystallised segment.
As the contribution is received after 30 June 2007, it cannot form part of the member's super interest before 1 July 2007.
Instead, the contribution would be caught under section 307-220 in working out the contribution segment of the member's super interest.
Scenario 3 - In-specie contributions
Due to the volume of transactions at year end a number of off market transfer documents were received by share registries but not processed in a timely manner. While most transactions were processed with effect of the date received. Some clients had completed the wrong form, that is broker sponsored form for issuer sponsored holdings or visa versa. The share registry did not identify this until the transaction was to be processed and returned the forms and requested these be resubmitted on the correct form. The transaction is processed when the correct form is presented. That is:
n form receipted by the registry 27 June 2007
n form returned to the member 1 August 2007
n forms corrected and returned 14 August 2007, and
n forms processed 21 August 2007.
Tax Office response
Where the transfer of shares occurs on or after 1 July 2007 due to incorrect completion of forms, the value of the member's super interest will not include the value of the transfer in working out the crystallised segment.
As the transfer occurred after 30 June 2007, it cannot form part of the member's super interest before 1 July 2007.
Instead, the contribution may be taken into account under section 307-220 in working out the contribution segment of the member's super interest.
It is relevant to note that section 285-5 of the ITAA 1997 specifically allows for a contribution to be made by the transfer of property. The amount of the contribution is the market value of the property at the time the transfer takes place. The contribution will be made when the property is transferred to the fund.
When the transfer of shares occurs is discussed in the attached draft ATO IDs. Members are invited to comment on that draft ID at the meeting.
Scenario 4 - Rollovers and transfers
Due to the volume of transactions at year end a number of superannuation funds were unable to process rollovers in a timely manner. A review of the documentation reveals that the ROPN is dated 28 June 2007 although the transaction was not processed until 28 July when the cash was received by the fund. That is:
n request for rollover June 2007, and
n request processed and documentation provided to the recipient fund 28 July 2007 .
Tax Office response
Where the transfer or rollover occurs on or after 1 July 2007 due to delays in processing, the value of the member's super interest in the receiving fund will not include the value of the transfer or rollover in working out the crystallised segment.
As the transfer or rollover occurred after 30 June 2007, it cannot form part of the member's super interest in the receiving fund before 1 July 2007.
Instead, the contribution may be taken into account under section 307-220 in working out the contributions segment of the member's super interest.
In the current scenario, the rollover or transfer occurred after 1 July 2007, in which case the amount of the rollover could not possibly form part of the member's interest in the receiving fund before 1 July 2007.
On the contrary, it is the paying fund that would be the holder of the member's interest before 1 July 2007 and as a result, the calculation of the crystallised segment would lie with the paying fund.
A rollover payment which occurs post 30 June 2007 would have to operate under the new simplification laws pursuant to Part 3-30 of the ITAA 1997. Accordingly, the payment would need to satisfy the meaning of a rollover superannuation benefit under section 306-10 of the ITAA 1997 and the benefit would include tax-free and/or taxable components worked out in accordance with Division 307 of the ITAA 1997. The receiving fund will then take the roll-over benefit into account when working out the contributions segment under section 307-220.
Scenario 5 - Rollovers and transfers
Due to the volume of transactions at year end a number of superannuation funds were unable to process rollovers in a timely manner. A review of the documentation reveals that the ROPN is dated 5 July 2007 although the transaction was requested prior to 30 June 2007 . That is:
n request for rollover June 2007, and
n request processed and documentation provided to the recipient fund 5 July 2007.
Tax Office response - the answer is the same as scenario 4
Where the transfer or rollover occurs on or after 1 July 2007 due to delays in processing, the value of the member's super interest in the receiving fund will not include the value of the transfer or rollover in working out the crystallised segment.
As the transfer or rollover occurred after 30 June 2007, it cannot form part of the member's super interest in the receiving fund before 1 July 2007.
Instead, the contribution may be taken into account under section 307-220 in working out the contributions segment of the member's super interest.
In the current scenario, the rollover or transfer occurred after 1 July 2007, in which case the amount of the rollover could not possibly form part of the member's interest in the receiving fund before 1 July 2007.
On the contrary, it is the paying fund that would be the holder of the member's interest before 1 July 2007 and as a result, the calculation of the crystallised segment would lie with the paying fund.
A rollover payment which occurs post 30 June 2007 would have to operate under the new simplification laws pursuant to Part 3-30 of the ITAA 1997. Accordingly, the payment would need to satisfy the meaning of a roll-over superannuation benefit under section 306-10 of the ITAA 1997 and the benefit would include tax-free and/or taxable components worked out in accordance with Division 307 of the ITAA 1997. The receiving fund will then take the roll-over benefit into account when working out the contributions segment under section 307-220.
Meeting discussion
The Chair advised that as there was no substantive analysis received with this submission some assumptions were required to provide answers for this meeting.
The Tax Office has prepared two draft ATO IDs based on a real case to help articulate its view. The draft ATO IDs circulated to members were:
Superannuation contributions: in specie contribution of listed shares
Did the taxpayer make an in specie contribution of shares to a self managed superannuation fund during the 2006-07 income year in circumstances where some steps were taken to transfer ownership of the shares to the trustee of the fund before 1 July 2007 but the trustee's ownership of the shares was not registered until 11 July 2007?
Superannuation contributions: in specie contribution of listed shares
Is the amount of an in specie contribution of shares to a self managed superannuation fund to be determined from the market value of the shares on the day the trustee agreed to accept the contribution if the shares are transferred to the trustee of the fund on a later day?
The Tax Office advised that the ATO IDs would not be published as ATO IDs, as their content will be incorporated into a proposed taxation ruling on contributions. Further, the views expressed in the draft ATO IDs should not be relied on as the Tax Office will need to formalise its views through the formal rulings process (including consideration by the Rulings Panel) and will need to consult APRA to ensure a consistency of approach.
A member asked would the Tax Office use its discretion to disregard a contribution where a contribution is found to have been made at a later time than a member or employer intended.
The Tax Office responded referring to the practice statement and said given the draft ATO ID relies on identifying either the date of registration evidencing the change of ownership or some earlier time when a member has done everything necessary to effect a change of ownership, there would be no basis for exercising the discretion to treat a contribution as having been made at any earlier time.
Another member noted that the draft ATO ID concerned listed shares and asked if the Tax Office's proposed approach extended to land transfers? The Tax Office confirmed it would.
In relation to other aspects of the Tax Office's interim response, it was suggested that there were some practical issues to consider, particularly in relation to transfers and roll-overs. It was suggested that the Superannuation Consultative Committee and Superannuation Funds Administrators groups might wish to consider the answer.
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Action item: |
NTLGSPR310308/5
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Status: |
Members to provide details of any practical issues for consideration of the SCC by 19 May 2008. Email SCC secretariat: SCC@ato.gov.au. |
This issue has been raised with the SCC, and specific details should be provided to the SCC secretariat. Email SCC Secretariat: SCC@ato.gov.au
Total and permanent disability
Total and permanent disability premium deductions for superannuation funds
Issue raised
n Is a premium for total and permanent disability (TPD) insurance deductible to a superannuation fund where the policy pays out benefits in circumstances which do not meet specific definition of a 'disability superannuation benefit'?
Background information
Under the ITAA 1936 provisions relating to deductibility of insurance premiums, premiums for TPD cover were deductible to a superannuation fund if they were in respect of policies that provided benefits to a member in the event of their permanent disability (sections 267 and 279 of the ITAA 1936). Permanent disability was not defined in the ITAA 1936 and many providers in the industry interpreted it as covering a range of different TPD definitions.
The new ITAA 1997 provisions addressing deductibility of insurance premium expenses for complying superannuation funds are intended to reflect those ITAA 1936 provisions so that outcomes would not change. Specifically, paragraph 3.1 of the EM to the Tax Laws Amendment (Simplified Superannuation) Act 2007 indicates that:
'rewritten provisions in Division 295 of the ITAA 1997 do not change the law as it currently operates under Part IX of the ITAA 1936.'
However, under the new provisions, the ability for a fund to deduct insurance premiums for TPD benefits depends on whether the premiums are in respect of insurance policies that provide disability superannuation benefits (sections 295-460 and 295-465 of ITAA 1997). The new legislation (section 995-1(1)) very specifically defines disability superannuation benefit as a benefit if:
n the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental), and
n two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.
It is common for TPD policy definitions to differ from the exact requirements for a disability superannuation benefit to varying degrees. For example, some TPD policies will pay benefits if the member is unable to work in their current or normal occupation (commonly referred to as 'own occupation' TPD benefits). In some of these cases the member may still be able to work in other occupations for which they are reasonably qualified by education, experience or training.
Industry view/suggested treatment
We seek confirmation from the Tax Office that the new provisions will be administered in line with the previous law, that is, it will not be necessary for the TPD definitions to be aligned with the definition of disability superannuation benefit in order for the fund to be able to claim the premiums as a deduction.
Technical references
Former sections 267 and 279 of the ITAA 1936.
Sections 295-460, 295-465 and 995-1 (definition of disability superannuation benefit) of the ITAA 1997.
Impact on clients
Superannuation fund members could face reduced TPD insurance coverage through their superannuation fund if deductibility is inadvertently tightened.
Priority of issue where Tax Office view is required
Medium.
It is important that the industry has certainty regarding the tax treatment of total and permanent disability insurance premiums.
Tax office preliminary view
n Is a premium for TPD insurance deductible to a superannuation fund where the policy pays out benefits in circumstances which do not meet specific definition of a 'disability superannuation benefit'.
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Section 295-465 allows a complying superannuation fund to deduct a specified proportion of an insurance premium where the policy provides for a benefit referred to in section 295-460. A disability superannuation benefit is a particular type of benefit provided for in section 295-460. This benefit is defined in section 995-1 as disability superannuation benefit means a *superannuation benefit if: |
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(a) |
the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental), and |
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(b) |
two legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be *gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training. |
Accordingly it will be necessary for the TPD definitions within insurance policies to be aligned with the definition of disability superannuation benefit in order for a fund to be able to claim the premiums actually paid under those policies as a deduction.
Where the benefits provided by a policy are not aligned to the benefit definitions in section 295-460, the portion of the premium that is deductible is determined under either Item 5 or Item 6 in the table to section 295-465.
Item 5 allows a deduction for that part of a premium that is specified in the policy as being wholly for the liability to provide benefits referred to in section 295-460.
Item 6 applies if the policy does not specify the amount of premium attributable to the provision of particular benefits. Item 6 allows a deduction for so much of other insurance policy premiums as are attributable to the liability to provide benefits referred to in section 295-460 where an actuarial certificate has been properly obtained.
Meeting discussion
A member raised the fact that this question related to a provision in the income tax which was subject to the Part IX rewrite of the provisions in the ITAA 1936. These were not expressed as a change. If the view expressed by the Tax Office is correct, this member believed that the law has been changed. The representative stated that very few, if any, insurance policies currently held by funds would meet the new definition. He said the issue is therefore how much difference the Tax Office is prepared to accept or how far it could go in varying the definition? Another representative supported these views suggesting that the interim response could mean re-writing the contracts and/or product disclosure statements.
The Tax Office advised that there did not appear to be any scope to interpret the ITAA 1997 provisions in the manner sought by industry under this agenda item. It noted that the new law was clear on the words of the provision as enacted by Parliament. The Tax Office sought additional information from members of the implications of the new definition for 'disability superannuation benefit' on TPD insurance covers and if appropriate, would formally raise the policy issue further with Treasury.
There were no previous Tax Office rulings on the meaning of 'permanent disability' under section 267 of the ITAA 1936. The Tax Office was yet to conclude whether the terms of the new definition effected a change to the previously existing law and noted the advice from industry that many current insurance policies are not aligned to the definition contained in the ITAA 1997.
Some industry members requested that no formal Tax Office position be expressed in the minutes while this matter was being worked through.
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Action item: |
NTLGSPR310308/6
What are the implications for industry? |
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Status: |
Members to provide secretariat with what are the implications for industry, including any technical analysis. Submissions by 19 May 2008. Email NTLG secretariat: NTLGSPRSubcommittee@ato.gov.au |
Validity of personal tax deduction
Validity of personal tax deduction notices where member starts pension if sufficient remains in the 'accumulation' account
Issue raised
n Initial question raised at the 4 December 2007 meeting - members were asked to provide further examples.
Tax deduction of personal superannuation contributions and notice variations
Question 1
Subsection 290-170(2) provides that a notice to claim a deduction for contributions is not valid where:
n the notice is not in respect of the contribution
n the trustee or RSA provider no longer holds the contribution, or
n the trustee or RSA provider has begun to pay a superannuation income stream based in whole or part on the contribution.
The industry's view is that, provided personal contributions of the amount set down in the notice have been made in the applicable financial year and the amount of the tax free component remaining in the member's account covers the value of personal contributions specified in the notice, the notice can be accepted regardless of the sequence of benefit payments/pension commencement and contributions made to the account.
Is the Tax Office prepared to accept that as long as sufficient tax free funds are held in the member's accumulation account just before the member 'gave the notice of intent to claim a tax deduction' for their personal contributions in a particular year that a valid notice may be given?
Example
Rachel's superannuation interest is valued at $150,000 ($50,000 tax free, $100,000 taxable). Rachel makes a $50,000 personal contribution in March 2008 which would be counted against the tax free component of her superannuation interest at the time it is received. Her total superannuation account balance is $200,000 ($100,000 tax free, $100,000 taxable).
Assume Rachel commences a pension for $180,000 in May 2008 leaving $20,000 (10,000 tax free, $10,000 taxable) in her account. Rachel then rolls $40,000 (all tax free) into her fund in June 2008 just prior to lodging a notice in September 2008. Her total account balance is $60,000 (50,000 tax free, 10,000 taxable). Is Rachael eligible to lodge a valid notice to claim a tax deduction for all or part of the $50,000 contribution?
Background
The example in the EM to Tax Laws Amendment (Simplified Superannuation) Bill 2006 and supporting Bills (paragraph 1.54) indicates that where residual funds remain in a member's account after a partial rollover (which would also presumably apply to commencement of a pension using part of the account balance), then a valid notice may be given.
We believe that this would also apply if after a partial rollover or commencement of a pension, the member has sufficient funds in the account just prior to giving the notice but where this may have occurred by virtue of additional contributions and/or rollovers. Provided the personal contributions were made in the year and there is sufficient tax free in the account to cover the value stipulated in the notice, then the trustee should be able to accept the notice.
We believe the intent of the provisions was to provide clarity to trustees in the law so that a notice did not have to be accepted and tax paid if the value of the tax free in the member's account was insufficient to cover the amount in the notice. That is, the intent was to correct/clarify the provisions in the ITAA 1936 as alluded to in the EM to amendments to 82AAT(1C) in Taxation Laws Amendment (Superannuation) Bill 1993 so that if there was not sufficient benefits in the account the fund would not be obligated to act on the notice:
No adjustment can be made once a member leaves a fund because once benefits have been paid out it is too late for the fund to make the necessary adjustments (new subsection 82AAT(1C)).
Question 2
Can an eligible person vary the notice of intent to claim a deduction under section 290-180(3A) under the same conditions?
Example
Rachel's superannuation interest is valued at $150,000 ($50,000 tax free, $100,000 taxable). Rachel makes a $50,000 personal contribution in March 2008 which would be counted against the tax free component of her superannuation interest at the time it is received. Her total superannuation account balance is $200,000 ($100,000 tax free, $100,000 taxable).
Rachel lodged a notice to claim 100% of her $50,000 personal contribution in April 2008. Rachel commences a pension for $180,000 in May 2008 leaving $20,000 in her account (5,000 tax free, 15,000 taxable). Rachel then rolls $40,000 (all tax free) into her fund in June 2008. The total account is now $60,000 (45,000 tax free, 5,000 taxable). Is Rachel eligible to lodge a notice to vary (up to $45,000) the original notice of intent to claim a deduction?
Background Information
History
Section 290-180(3A) inserted by No 15 of 2007, section 3 and Schedule 3 item 15, applicable to the 2007-2008 income year and later years.
Industry view/suggested treatment
As long as sufficient tax free funds remain in the accumulation phase ( at a fund level ) then taxpayers should be able to lodge a valid 'notice of intent to claim a tax deduction' in respect of personal contributions made in a particular financial year - this is regardless of the source of those funds.
Note that (tax free) amounts contributed by way of rollover would not in themselves be deductible to a member as these amounts are not personal contributions. However a tax free rollover may allow a valid notice to subsequently be lodged if the tax free amount specified in the notice is equal to or less than the amount of personal contributions made during the year.
Technical references
EM to Tax Laws Amendment (Simplified Superannuation) Bill 2006 and supporting Bills.
1.54 An example of when the trustee or RSA provider no longer holds a contribution is where the member has requested a partial roll-over of the superannuation benefit which includes the contribution covered in the notice.
Example 1.2
Rachel's superannuation interest is valued at $5,000 (tax free component). She makes a $10,000 personal contribution in March 2008 which would be counted against the tax free component of her superannuation interest at the time it is received. Her total superannuation account balance is $15,000.
In June 2008, Rachel requests to rollover $6,000 leaving her with a balance of $9,000. She then lodges a notice in September 2008 advising that she intends to claim a deduction on the $10,000 contribution made in the 2007-08 income year.
As her account balance is only $9,000, all of the $10,000 contribution is no longer held by the trustee and therefore the notice is not valid. However, if Rachel were to lodge a notice for $9,000, this would be valid. The trustee would then convert the $9,000 from a tax free component to a taxable component and include this amount in the fund's assessable income.
Validity of notices
Section 290-170(2)
The notice is not valid if at least one of these conditions is satisfied:
n the notice is not in respect of the contribution
n the notice includes all or a part of an amount covered by a previous notice
n when you gave the notice:
? you were not a member of the fund or the holder of the RSA
? the trustee or RSA provider no longer holds the contribution, or
? the trustee or RSA provider has begun to pay a *superannuation income stream based in whole or part on the contribution.
History
Section 290-170(2) amended by No 15 of 2007, section 3 and Schedule 4 item 3, by substituting 'contribution' for 'contributions' in paragraph (c)(iii), effective 15 March 2007.
Section 290-180 notice may be varied by not revoked or withdrawn.
290-180(3A)
The variation is not effective if, when you make it:
n you were not a member of the fund or the holder of the RSA
n the trustee or RSA provider no longer holds the contribution, or
n the trustee or RSA provider has begun to pay a superannuation income stream based in whole or part on the contribution.
Impact on clients
Provides greater flexibility and clarity for trustees to accept tax deduction notices (where otherwise valid) for member's personal super contributions notwithstanding a partial rollover or commencement of a pension during the year.
There is no impact on trustees from an 'out of pocket' taxation perspective. Record keeping requirement if one account closed and another account exits.
Tax Office response at 4 December 2007 meeting
Question 1
Subsection 290-170(2) provides that a notice to claim a deduction for contributions is not valid where:
n the notice is not in respect of the contribution
n the trustee or RSA provider no longer holds the contribution, or
n the trustee or RSA provider has begun to pay a superannuation income stream based in whole or part on the contribution.
The industry's view is that, provided personal contributions of the amount set down in the notice have been made in the applicable financial year and the amount of the tax free component remaining in the member's account covers the value of personal contributions specified in the notice, the notice can be accepted regardless of the sequence of benefit payments/pension commencement and contributions made to the account.
Is the Tax Office prepared to accept that as long as sufficient tax free funds are held in the member's accumulation account just before the member 'gave the notice of intent to claim a tax deduction' for their personal contributions in a particular year that a valid notice may be given?
Tax Office response
No. The sequence of events is essential to determining the validity of a section 290-170 notice. A notice will be invalid if it is given to the fund after a personal contribution has been taken into account when determining the proportions of an income stream that has commenced.
Explanation
The receipt of a notice of intention to deduct a personal contribution effectively turns a contribution that would be taken into account in determining the contributions segment (and subsequently the tax free component) of a superannuation interest into a contribution that would be taken into account in determining the taxable component of the interest. This means that upon receipt of a valid notice, the contributions segment of the person's interest will be reduced by the amount nominated in the notice.
Subsection 290-170(2) of the ITAA 1997 provides guidance on the validity of notices. That subsection provides:
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The notice is not valid if at least one of these conditions is satisfied: |
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(a) |
the notice is not in respect of the contribution |
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(b) |
the notice includes all or a part of an amount covered by a previous notice, and |
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(c) |
when you gave the notice: |
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(i) |
you were not a member of the fund or the holder of the RSA |
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(ii) |
the trustee or RSA provider no longer holds the contribution, or |
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(iii) |
the trustee or RSA provider has begun to pay a *superannuation income stream based in whole or part on the contribution. |
The law requires that the notice be in respect of the contributions made in the relevant financial year that are still held by the fund and not be the subject of an income stream based in whole or part in the contribution.
Where an income stream has commenced to be paid that is based in whole or part on the contributions, the conditions are not satisfied and the notice is not valid. This is the case even if subsequent amount containing a tax free component is rolled into the fund from another fund. A deduction cannot be claimed in respect of a contribution in the form of a roll over superannuation benefit - section 290-5.
In the example submitted with the question, Rachel has a superannuation interest valued at $150,000 ($50,000 tax free and $100,000 taxable). Rachel makes a $50,000 personal contribution in March 2008 which is, at that stage, a non-concessional contribution that would be counted as part of contributions segment (and subsequently the tax free component). Her total superannuation account balance is subsequently $200,000 ($100,000 tax free, $100,000 taxable).
Rachel could at this point in time lodge a section 290-170 notice to claim a deduction for an amount in that income year of up to $50,000. That is, any amount up to the amount she has made as a personal contribution in that year.
If, before lodging a section 290-170 notice, she were to commence a pension for $180,000 the fund would have to determine the proportions of her superannuation interest and apply those proportions to the pension and residual accumulation interest. (Half of the interest at that time would be taken to be the tax free component, meaning the pension interest would comprise a $90,000 tax free component of the total $180,000 and the residual accumulation interest would comprise a $10,000 tax free component of the total $20,000.) Subparagraph 290-170(2)(c)(iii) would mean she could not lodge a valid notice for any amount of the $50,000 contributions made in March.
However, having regard to Example 1.2 in the EM to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 the outcome is different if Rachel were to rollover an amount instead of commencing a pension.
In that example Rachel, by rollover, reduces the amount of her contributions segment below the amount contributed in the relevant financial year. She contributed $10,000 but her contributions segment remaining in the fund is only $9,000. A notice can now only be given in respect to the $9,000 remaining in the contributions segment of her interest in the fund. If she were to lodge a notice for more than this amount it would be invalid. If an invalid notice is made she can not vary this notice down, see response to Question 2.
Using the figures provided in the example to this query, suppose before lodging a section 290-170 notice, Rachel were to rollover $180,000 in May leaving $20,000 ($10,000 tax free and $10,000 taxable). The EM indicates she could lodge a valid notice for an amount up to $10,000 of the $50,000 contributions made in March. The payment of a rollover does not have the effect of making the notice invalid under section 290-170(2).
It does not matter that the amount Rachel rolls over to her fund includes a tax free component. That contribution cannot be deducted - see section 290-5.
The Tax Office considers that the inconsistency in the effect of section 290-170 notices between the commencement of a pension, the payment of a rollover or the payment of a lump sum may be required to be addressed by an amendment. The Tax Office intends to draw the matter to the attention of the Treasury.
Question 2
Can an eligible person vary the notice of intent to claim a deduction under section 290-180(3A) under the same conditions?
Answer
No. Once a taxpayer lodges a valid notice, the amount of the notice can not be varied down, if the contribution to which the notice relates is the basis (in whole or in part) of an income stream. The taxpayer will be bound by the original notice. The exclusions in subsection 290-180(3A) operate in the same way as those in subsection 290-170(2).
Meeting discussion of 4 December 2007 meeting
Some members stated that they did not agree with the Tax Office's draft answer. They believed that Treasury had intended to overcome a problem with the notice requirements of the ITAA 1936. The new provision was meant to allow funds to simply enquire whether the member's account held enough personal contributions to allow the notice to be given. The Tax Office stated that the interaction of the notice provisions with the proportioning rule that applies for benefits has to be considered in this case and the new provisions do not appear to operate as simply as was being suggested.
The Tax Office had sought, but not received, input from Treasury as to the policy intention underlying the change prior to the meeting.
Several of the members suggested the answer should not be finalised advising that they would make a further submission to the Tax Office on the issue.
The Chair agreed to defer finalisation of the answer until the March 2008 meeting.
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Action item: |
NTLGSPR041207/07
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Status: |
IFSA, ASFA and CPA to provide further submissions on their alternative view for discussion at next meeting. Submissions by 1 February 2008. Email NTLG secretariat: NTLGSPRSubcommittee@ato.gov.au |
Action item NTLGSPR041207/07 - No formal submissions were received.
Tax Office preliminary response for March 2008 meeting
Validity of personal tax deduction notices where member starts pension if sufficient remains in the 'accumulation' account
The Tax Office confirms the views it expressed at the December 2007 meeting.
The Tax Office will update the instructions that accompany the approved form used by individuals to notify a fund they intend to deduct their personal superannuation contributions. Consideration will also be given to altering the instructions to the rollover payment notice to clarify how a fund should complete the label concerning current year contributions.
Meeting discussion for March 2008 meeting
A representative advised that most funds would have implemented one rule that doesn't distinguish between roll-overs and pensions and as such there would be a strong reluctance to adopt the Tax Office view. Funds do not track contributions and their systems look only at account balances. Members stated that funds would require time to adjust their systems to follow the Tax Office's approach.
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Action item: |
NTLGSPR310308/7
Members to provide further submissions on implementing the ATO view. |
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Status: |
Members to provide secretariat with submissions by 19 May 2008. Email NTLG secretariat: NTLGSPRSubcommittee@ato.gov.au |
Application of the proportioning rule
Application of the proportioning rule to a superannuation interest (aggregation)
Issue raised
n Application of the proportioning rule to a death benefit paid from a pension - are the benefit's tax components determined in isolation from any accumulation monies held in the fund in respect of the deceased?
Background information
A member of a large retail fund may have both an accumulation account and an account-based pension. Under the proportioning rule (section 307-125 of ITAA 1997), the tax components of the pension are determined at commencement and the proportions are locked in. Once the pension commences it is treated as a separate superannuation interest.
The member has two separate death benefit nominations: one for his accumulation account and one for his pension account (these may or may not specify the same beneficiary).
On the member's death, is the payment of a death benefit from the pension still regarded as a separate interest? That is, are the tax components of a death benefit paid from the pension to be determined based on the proportions that were set at the pension's commencement (or would there be a need to take into account the member's accumulation interest)? Would the answer be any different if the member was a member of a self-managed superannuation fund?
We consider that the use of the word 'always' in Regulation 307-200.5 of the Income Tax Assessment Act 1997 Regulations (ITAR 1997) suggests that the proportions calculated at the commencement of the pension would apply (as the amount supporting the income stream is always to be treated as a separate interest).
Further, depending on the nature of the pension, it is arguable that a payment of the residual balance as a death benefit constitutes a commutation of the pension and as such section 307-125(3) of ITAA 1997 would apply which provides that a benefit arising from the commutation of an income stream is paid in the proportions that were calculated at commencement of the income stream.
Industry view/suggested treatment
We consider that the use of the word 'always' in ITAR 1997 Regulation 307-200.05 suggests that the proportions calculated at the commencement of the pension would apply (as the amount supporting the income stream is always to be treated as a separate interest).
Technical references
Section 307-125 of ITAA 1997.
Impact on clients
On the member's death, is the payment of a death benefit from the pension still regarded as a separate interest? That is, are the tax components of a death benefit paid from the pension to be determined based on the proportions that were set at the pension's commencement (or would there be a need to take into account the member's accumulation interest)? Would the answer be any different if the member was a member of a self managed superannuation fund?
Priority of issue where Tax Office view is required
Medium.
Tax office preliminary view
n Application of the proportioning rule to a death benefit paid from a pension - are the benefit's tax components determined in isolation from any accumulation monies held in the fund in respect of the deceased?
Yes, the death benefit's tax components are determined in isolation from any accumulation monies held in the fund in respect of the deceased.
Regulation 307-200.05 of the ITAR 1997 states:
If a superannuation income stream commences, an amount that supports the superannuation income stream is always to be treated as a separate interest.
This regulation applies to superannuation income streams paid from all superannuation funds, including self managed superannuation funds.
The Explanatory Statement to Income Tax Assessment Amendment Regulations 2007 (No 2) explains the effect of this regulation as follows:
The amount supporting the superannuation income stream is treated as a separate interest. Any other amounts, benefits or entitlements that are held in the superannuation plan on behalf of the same contributor which do not support a superannuation income stream are treated as another superannuation interest.
The tax components of any benefit (including a death benefit) that is paid from the interest supporting the superannuation income stream will depend on the proportions of the corresponding components of that interest. The components of the interest supporting the superannuation income stream are determined in isolation from any other amounts held in the fund in respect of the member. Hence, the tax components of a benefit (including a death benefit) paid from the interest supporting the income stream are independent of any other amounts held in the fund in respect of the member. This rule applies to superannuation income streams paid from all superannuation funds, including self managed superannuation funds.
It is noted that the NTLG submission raises the question of whether a payment of the residual balance as a death benefit constitutes a commutation of the pension. As previously advised, this issue is actively being considered by the Tax Office in the context of current pension liability and we are presently not able to provide further advice with respect of this particular aspect.
Meeting discussion
See meeting discussion at agenda item 10.
Superannuation death benefits
Issue raised
n When is a pension considered to cease upon the death of a member?
n What considerations will be applied by the Commissioner when determining if a death benefit has been paid in accordance with SIS?
Background information
If you pay a death benefit from a pension outside the three month/six month period it is classified as a 'member benefit' rather than a 'death benefit'. Section 307-5(3).
Death benefits are tax free to dependants while member benefits are potentially taxed (if the recipient is under 60).
However, if the payment is made to a non dependant who is over 60, it would seem to be beneficial to be taxed as a member benefit. If it is a member benefit it will be tax free (as an individual over 60 receives their own super tax free) while if it is a death benefit it will be taxed at 16.5% on the taxed component (on the basis that the recipient is not a dependant).
Division 304 states that a benefit payment made which is not in compliance with SIS is assessed as income of the recipient.
As there appears to be a tax benefit in delaying a death benefit payment from a pension to some non-dependant beneficiaries.
When is a pension considered to cease upon the death of a member?
What considerations will be applied by the Commissioner when determining if a death benefit has been paid in accordance with SIS? Clarification of the Commissioners view to ensure consistent and correct treatment in the market place.
Industry view/suggested treatment
The pension ceases when potential beneficiaries are identified and their dependency status is determined; as until this time there is potential for the pension status of the fund to continue.
Fund not remitted to the beneficiary within 90 days of this determination may be treated as assessable income.
Technical references
Section 307-5.
Division 302.
Division 304.
Impact on clients
Clarification of the Commissioners view to ensure consistent and correct treatment in the market place.
Priority of issue where Tax Office view is required
Medium.
Tax office preliminary view
Superannuation death benefits
n When is a pension considered to cease upon the death of a member?
n What considerations will be applied by the Commissioner when determining if a death benefit has been paid in accordance with SIS?
As previously advised, the Tax Office is considering a number of threshold questions concerning the payment of superannuation benefits upon the death of a primary beneficiary. These issues are being considered through the priority technical issues (PTI) process as a part of Tax Office deliberations concerning current pension liability. The issues relevant to this NTLG submission that are being considered as part of this PTI process include:
n when will an interest that supports a superannuation income stream be taken to have ceased for tax purposes and how may such an interest cease
n when will a payment from an interest that supports a superannuation income stream be taken to be a superannuation lump sum for tax purposes
n what is a commutation, and
n when will a pension that is payable on the death of a primary beneficiary be taken for tax purposes to be a reversionary pension as opposed to a new pension.
Accordingly, the Tax Office is not currently able to respond to the query concerning the status of the pension after the death of the primary beneficiary while considering its position through the abovementioned process.
With respect to the query concerning payment of death benefits in accordance with the SIS, it is not entirely clear which aspects of the SIS the submission is particularly concerned with. However we expect that the primary concern is the requirement in Regulation 6.21(1) of the SISR that the benefit must be cashed as soon as practicable after the member dies. This question is an objective one of fact to be determined by the Commissioner in light of the individual circumstances of each case. In this regard, and as regulator of SMSFs in particular, the Tax Office will determine that a benefit has been paid as soon as practicable where it is reasonable to do so taking the unique circumstances of the fund into account.
Meeting discussion
See meeting discussion at agenda item 10.
Issues concerning current pension liability
n Progress update for general discussion.
Current status
The Tax Office invited members of the NTLG Superannuation Sub-committee to provide relevant details from trust deeds to enable the Tax Office to undertake further, more refined analysis of the issues identified so far in relation to the exemption for current pension liabilities. Several members have provided extracts from various fund rules.
We believe this information is necessary to help us establish exactly what a fund's pension liability can comprise, particularly having regard to the different ways in which the concepts pension and annuity are defined in the SISR and the different characteristics that apply to each kind of pension or annuity. We also believe it will help us determine the nature of the benefits (liabilities) payable after a member's death - for example, can the benefit truly be said to be a mere continuation of an existing liability in the sense that it may be characterised as a contingent liability, or whether the death benefit arises from some other liability of the trustee. We believe there should be general principles that can be developed from the case law arising in other contexts (particularly, bankruptcy/insolvency law) that will help us answer these questions of fact and law.
Case law discussion - contingent liabilities
Contingent liabilities are sums, the payment of which depends on a contingency, that is sums which will only become payable if certain things happen and which otherwise will never become payable (re Sutherland [1963] AC 235, per Lord Reid at p 247).
Contingent liabilities are different from future liabilities which are binding on the company but not payable until a future date (re William Hockley Ltd (1962) 2 All ER 111). However, in Something Better Pty Ltd v Pyramid Building Society (in Liquidation) [1996] 2 VR 352, Tadgell JA said at 370:
'Future and contingent debts and liabilities are, however, nowhere defined in the Bankruptcy Act and I do not think that they can properly be treated as terms of art. There are more ways than one of describing a debt or a liability which is payable or to be discharged in future and a debt or liability which is payable or to be satisfied upon a contingency. Moreover, the contingencies to which a liability may be subject are so various that the adjective 'contingent', when applied to it, is likely to be of imprecise connotation.'
The various meanings of contingent liability that have emerged from bankruptcy case law were considered in Lyford v Carey (1985) 3 ACLC 515, where it was remarked that in all of the previous judgments the concept of an existing obligation is seen to be essential to the existence of a contingent liability. Franklyn J provided, at 518 that for a debt to be contingent '… there must be an obligation upon which the contingency can operate', being an obligation that 'must exist as at the date of bankruptcy'. Franklyn J stated further that:
'Where discretion is required to be exercised in a way which impacts on or is relevant to a debt, there is no obligation to pay until the discretion is exercised (at 519'.
In later cases involving the Tax Office as a party, the following comments have been made on the nature of a contingent liability for the purposes of the Bankruptcy Act.
In Jones as Trustee of the Bankrupt Estate of Graham v Deputy Commissioner of Taxation (1998) 157 ALR 349 at 354.
A debt need not be due and payable at the date of bankruptcy to be provable in the bankruptcy, but there must be an obligation upon which the debt is founded, being an obligation which was incurred before the time of bankruptcy.
In Gaffney v Commissioner of Taxation (1998) 81 FCR 574 Mansfield J at 578, provides that for a debt to be provable in bankruptcy, there must be:
'... existing circumstances which (give) rise to a contingent debt or liability, and which would crystallise by the happening of some future event'.
More recently, in Health Insurance Commission v Trustee in Bankruptcy of the Estate of Ioakim Alekozoglou [2003] FCA 848 at [58]:
'An obligation must be a recognisable one created by law and must not be some amorphous vulnerability to a possible debt'.
However, relevantly re Kavich; Kavich v Official Trustee in Bankruptcy (1995) 58 FCR 82, provides at 86-87:
'The questions for determination must be decided by reference to the language of the relevant statutes...'
Superannuation income stream benefit regulations
Subsection 995-1(1) defines *superannuation income stream benefit and *superannuation income stream to have the meanings given by section 307-70. It further defines *superannuation benefit and *superannuation death benefit to have the meanings given by section 307-5.
Subsection 307-5(1) generally provides that a *superannuation benefit is a payment described in the relevant table. For example, an Item 1 superannuation member benefit is a 'payment to you from a superannuation fund because you are a fund member'. An Item 1 superannuation death benefit is a 'payment to you from a superannuation fund, after another person's death, because the other person was a fund member'.
Section 307-70 provides that a *superannuation income stream benefit is:
a ' * superannuation benefit specified in the regulations that is paid from a * superannuation income stream' where a ' * superannuation income stream has the meaning given by the regulations'.
Section 307-65 provides:
'a *superannuation lump sum is a * superannuation benefit that is not a * superannuation income stream benefit'.
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Divisions 301 and 302 of the ITAA 1997 are clearly structured such as to distinguish the taxation of superannuation income stream benefits from the taxation of superannuation lump sum benefits. |
Subregulation 995-1.01 generally provides that a *superannuation income stream means an income stream that is taken to be a pension (or an annuity) for the purposes of the SISA in accordance with sub-regulation 1.06(1) (or 1.05(1)) of the SISR, or an income stream that is an annuity or pension within the meaning of the SISA and that commenced before 20 September 2007. In other words, a pension or annuity will not be a superannuation income stream for tax purposes unless it meets the relevant SISR pension and annuity standards.
Sub-regulation 995-1.01 provides:
'a *superannuation income stream benefit means a payment from an interest that supports a * superannuation income stream other than a payment to which regulation 995-1.03 applies.'
Regulation 307-200.05 provides:
'if a superannuation income stream commences, an amount that supports the superannuation income stream is always to be treated as a separate superannuation interest.'
Regulation 995-1.03 provides:
'A payment from an interest that supports a superannuation income stream is not a superannuation income stream benefit if:
(a) the conditions to which the superannuation income stream is subject allow for the variation of the amount of the payments of benefit in a year in circumstances other than:
(i) the indexation of the benefit under the rules of the product
(ii) the application of the family law splitting provisions
(iii) the commutation of the benefit (including commutation to pay a surcharge liability), or
(iv) the payment of an assessment of excess contributions tax, and
(b) the person to whom the payment is made elects, before a particular payment is made, that that payment is not to be treated as a superannuation income stream benefit.'
This regulation aims to allow recipients of certain superannuation income stream types - basically account based income streams - to elect that a payment they receive from the income stream is to be treated as a lump sum benefit instead of an income stream benefit.
n Interestingly, the relevant Explanatory Statements to these income tax regulations notes that an amount which a person elects to take as a lump sum does not count against the minimum draw down requirements even though there is no concept in the benefits taxing provisions of 'minimum draw down requirements' - this is only a SISR concept.
There are a number of significant problems with the drafting of regulation 995-1.03 that need further consideration. These include:
n the application of regulation 995-01.03 in the absence of a specific election by the recipient where the benefit may be a genuine lump sum payment that has come about by a commutation or by the operation of the fund rules or the SISR. If a literal interpretation were taken of regulation 995-01.03, the prospect that a payment may be considered to be a lump sum arising from a commutation for the purposes of the SISR but an income stream benefit for tax purposes may arise
n Regulation 995-1.03 can not apply at all to a payment from an interest that supports a superannuation income stream of a type that does not meet the requirements imposed by paragraph (a). It is most likely a number of traditional lifetime pensions - including those that are still provided by SMSFs under sunset provisions - will not meet the requirements of paragraph (a). This means all payments from such income streams will at all times be superannuation income stream benefits. One implication of this is that payments from such income streams can never be rolled over for tax purposes (for example, see section 306-10 of the ITAA 1997 which provides that only a superannuation lump sum benefit may be a superannuation rollover benefit)
n how does regulation 995-01.03 apply where a lump sum death benefit payment is made automatically from a non-reversionary account based pension? In such cases a person receiving the payment can make no genuine election. Further, the SISR prevents a non-dependent beneficiary from being paid an income stream on death.
A literal reading of regulation 995-1.03 is that any payment from a superannuation interest supporting a superannuation income stream is an income stream benefit for tax purposes unless the person, before any particular payment is made, elects that that payment not be a superannuation income stream benefit. That is, the person must elect that the payment be a superannuation lump sum instead.
This arguably means that as long as there is no election made before a payment is made, that payment will be an income stream benefit for tax purposes - not a lump sum for tax purposes - even though it may be a genuine lump sum payment that has come about by a commutation or by the operation of the fund rules or the SISR. Further, it raises the prospect that a payment may be considered to be a lump sum arising from a commutation for the purposes of the SISR but an income stream benefit for tax purposes.
n Although 'commutation' is a concept that is used extensively in the benefits taxing provisions and the SISR pension and annuity standards, it is not defined in the ITAA 1997, ITAR 1997 or the SISR. However, the Butterworths Australian Legal Dictionary gives the ordinary meaning of 'commutation' to be: 'the act of substituting one thing for another'. And, in a tax and revenue context to be: 'the substitution of regular future payments under a contract in exchange for a lump sum payment. For example, the conversion of future annuity or pension payments into a lump sum payment.
The inclusion of the concept of the 'election' in regulation 995-1.03 seems unusual when it is noted that the concept of 'commutation', recognised prior to 1 July 2007 in the ITAA 1936 benefits tax provisions and the SISR pension and annuity standards, already provided the mechanism by which a payment in respect of a superannuation income stream was classed a lump sum payment (and, hence, an ETP) rather than a pension or annuity payment.
One approach may be to take the view that a commutation of itself is an election for the purposes of regulation 995-1.03(b). However, while this would work in some cases (that is, where the person in question commutes or partially commutes an account based income stream that meets the requirements of regulation 995-1.03(a)) this approach would arguably not cover all relevant circumstances.
In particular, regulation 995-1.03 can not apply at all to a payment from an interest that supports a superannuation income stream of a type that does not meet the requirements imposed by paragraph (a). It is most likely a number of traditional lifetime pensions - including those that are still provided by SMSFs under sunset provisions - will not meet the requirements of paragraph (a). This means all payments from such income streams will at all times be superannuation income stream benefits.
One implication of this is that payments from such income streams can never be rolled over for tax purposes (for example, see section 306-10 of the ITAA 1997 which provides that only a superannuation lump sum benefit may be a superannuation rollover benefit).
Another issue arising from the ordinary meaning of commutation is whether it normally be taken to include a lump sum death benefit paid from a non-reversionary account based pension (or any other pension type that provides for a lump sum death benefit). That is, while it is the case that the contingent entitlement to future income stream payments that the deceased had immediately before death has been converted to a lump sum entitlement immediately after death - the basic requirement for a commutation to exist - it is also the case that the relevant new entitlement is no longer the deceased's. Would this latter feature of the lump sum payment be sufficient to preclude a commutation? Further work needs to be done on this.
n Interestingly, subregulation 292-25.01(4)(b)(ii)(C) of the ITAR 1997 contains the phrase 'on the commutation of the income stream as a result of the death of the primary beneficiary'.
n Also SISR 1.07A(2)(a), 1.07B(3)(a), 1.07C(2)(a) and 1.07D(1)(a) use the phrase (or some slight variation thereof), 'the commutation results from the death of the annuitant or pensioner or a reversionary annuitant or reversionary pensioner'.
n This suggests that at least Treasury (as super simplification instructors) consider that it is reasonable to conclude that a lump sum death benefit paid from a non-reversionary pension is a 'commutation'.
n Whatever we conclude a commutation to be for tax purposes should also be a commutation for SISR purposes.
Assuming for the moment that a lump sum death benefit payment from a non-reversionary income stream is not a commutation, a further problem may be that regulation 995-1.03(b) requires the person to whom the payment is made to elect. However, certain lump sum payments happen automatically. For example, some funds provide their members with a product option that only pays any remaining balance of their account based pension to a dependant on their death as a lump sum. In this case the person receiving the payment can make no genuine election. Similarly, the SISR prevents a non-dependant beneficiary from being paid an income stream on death. Is it plausible for us to take the view that where the rules of the fund or the SISR only permit a lump sum benefit to be paid on death that an 'election' for the purposes of regulation 995-1.03 will always be taken to have been made?
A secondary issue in this regard is the extent to which a lump sum death benefit paid from a non-reversionary income stream may be considered to be a 'residual capital value' (RCV) if it is not considered to be a commutation. Some relevant considerations in this respect are:
n the SISR does not define RCV. However, SISR 1.06(2), 1.06(7) and 1.06(8) pensions can't have a RCV. The better view would also appear to be that 1.06(9A)(a) and 1.06(9A)(b)(ii) can't have an RCV either (but a 1.06(9A)(b)(i) pension can)
n the ITAA 1997 does not define RCV but prior to 1 July 2007 the section 27A(1) of the ITAA 1936 defined RCV to mean: '….the capital amount payable on the termination of the annuity or superannuation pension…'. 'Helpfully, this definition was carried over into section 27H(4) of the ITAA 1936 as part of the SS amendments
n it is not immediately apparent what the 'capital amount payable on the termination of the pension' truly means and how and when it can be distinguished from a commutation. Further work needs to be done on this.
n however, interestingly, 27H(2) of the ITAA 1936 (both pre and post the SS amendments) effectively narrows the meaning of RCV to a concept where the RCV: is an amount that is either specified in the income stream contract or is capable of being ascertained from the terms of the contract when the income stream first commences - or in any other case, is a nil amount
n if anything, the concept of RCV poses stickier questions than 'commutation'. For example should an RCV be included in the value of the interest that supports the income stream? Further work needs to be done on this, and
n would it be defensible to take the view that where the rules of the fund provide for an RCV that an election for the purposes of 995-1.03 will always be taken to have been made?
Meeting discussion
The Chair explained to members what a PTI is and that Peter O'Reilly is the business risk owner of this particular PTI.
Peter O'Reilly outlined some of the main issues that the Tax Office is working through.
n Rewrite of Part IX but change in basic concepts (for example, superannuation income stream benefit).
n What did the law say previously?
n What does it say now?
n How is exemption triggered?
? when does exemption start?
n What happens once exemption begins?
? how do you calculate exempt amount?
n How does exemption end?
? what is the situation on death?
? how are lump sums treated?
? stop/start issues.
A member thought it was a really useful platform. The papers make it clear that whatever interpretation is adopted in one area, there will be a problem in another. The papers show that there are some fundamental transactions where the tax treatment is not clear or if clear may not be as intended. That will require legislative changes.
Members agreed that because of the range and complexity of the issues already identified in the papers it would be a good idea to form a subgroup to identify any further issues and explore those already identified. The group could help the Tax Office to identify:
n current practices and interpretations adopted by industry
n old law versus new law comparison of current pension exemption
n potential deficiencies in the law
n industry examples of problems identified, and
n whether members have any existing papers they can share with the Tax Office?
Members thought it would be a good idea for the Tax Office to produce a list of questions for members to answer. It would also be helpful if industry could identify practices that are followed in particular circumstances.
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Action item: |
NTLGSPR310308/8
Arrange a scoping phone hook-up and follow through with various workshops. |
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Status: |
Members to advise if they wish to participate in the hook-up and workshops to progress these issues by 19 May 2008. Email NTLG secretariat: NTLGSPRSubcommittee@ato.gov.au |
Other business
Terminal medical condition
A member noted that there are slight differences between the material covered by the Commissioner's pay as you go (PAYG) withholding variation for terminal illness payments and the draft legislation before Parliament. What will happen once the law is passed?
The meeting was advised that once the law was passed, funds would not be required to withhold from a payment that meets the legislation. There is no obligation to withhold from a payment that consists entirely of a benefit that is non-assessable non-exempt income.
Anti detriment payment
ATO ID 2007/219 issued on 30 November 2007 concerning the calculation of the extra amount that can be paid under section 295-485 of the ITAA 1997. It has been suggested that the Tax Office is reconsidering its view.
The Tax Office advised it is aware a private ruling has been requested on the operation of aspects of the section. If the ruling request raises the same issue, the Tax Office would expect the ATO ID to be applied. If a new issue is being considered, members can expect to see a new ATO ID published in the normal course of events.
In-house assets (transitional rule)
A member suggested that they would be making a submission to government asking for an extension to the transitional rules that apply to certain in house assets that are due to expire on 30 June 2009.
[H22]Next meeting
The next meeting of the NTLG Superannuation Technical Sub-group will be held on 16 June 2008.
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