Edited version of private ruling

Authorisation Number: 1011761383934

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Ruling

Subject:

Untaxed plan cap amount

Issue

Questions

Under section 307-350 of the Income Tax Assessment Act 1997, does a separate untaxed plan cap apply to each superannuation scheme from which you will receive a superannuation benefit?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are over 60 years of age.

You work for a state public service.

You contribute to both Fund A and Fund B.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 307-225.

Income Tax Assessment Act 1997 Section 307-350.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Superannuation Industry (Supervision) Act 1993 Section 10.

Reasons for decision

Summary of decision

Fund A and Fund B are separate public sector superannuation schemes. Consequently, as you are a member of both funds, a separate untaxed plan cap applies to your membership of each scheme.

Lump sum payments made to you from a superannuation fund will generally comprise a tax free component which may consist of a crystallised segment. The crystallised segment may consist of a pre-July 1983 component calculated as at 30 June 2007. Superannuation providers had until 30 June 2008 to calculate the crystallised pre-July 1983 component or face an administrative penalty.

Detailed reasoning

Untaxed plan cap

Under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) the untaxed plan cap amount has the meaning given in section 307-350 of the ITAA 1997.

Under section 307-350 of the ITAA 1997:

Your untaxed plan cap amount for a superannuation plan at the start of the 2007-2008 income year is $1,000,000.

If you receive one or more superannuation member benefits including an element untaxed in the fund from a superannuation plan at a time, reduce your untaxed plan cap amount just after that time:

· if the total of the elements untaxed in the fund falls short of your untaxed plan cap amount at that time - by the amount of the benefit or of the total of the benefits; or

· otherwise - to nil.

(2A) For the purposes of subsection (2), disregard subsection 307-5(8).

(2B) For the purposes of the application of this section in relation to superannuation lump sums paid by the Commissioner under subsection 17(2) and sections 20H and 24G of the Superannuation (Unclaimed Money and Lost Members) Act 1999, treat all such lump sums as if they were paid from a single superannuation plan.

At the start of each income year after the 2007-2008 income year, increase your untaxed plan cap amount for the superannuation plan by the amount (if any) by which the index amount for that income year exceeds the index amount for the previous income year.

For the purposes of subsection (3), the index amount for the 2007-2008 income year is $1,000,000. The index amount is then indexed annually.

The explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 states at paragraph 2.67:

2.67 The untaxed plan cap amount is a per plan limit, that is, a separate untaxed plan cap applies to each superannuation plan from which a person receives superannuation lump sum member benefits. The untaxed plan cap amount for each superannuation plan is reduced by the total amount of each element untaxed in the fund of a superannuation lump sum that a person has received, including roll-overs. [Schedule 1, item 1, subsection 307 - 350(2 )]

Subsection 995-1(1) of the ITAA 1997 defines a superannuation plan as a superannuation fund, an approved deposit fund or a retirement savings account.

A superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Section 10 of SISA states:

Superannuation fund means:

(a) a fund that:

(b) is an indefinitely continuing fund; and

(c) is a provident, benefit, superannuation or retirement fund; or

(d) a public sector superannuation scheme

Further, a public sector superannuation scheme is defined by SISA as:

· public sector superannuation scheme means a scheme for the payment of superannuation, retirement or death benefits, where the scheme is established:

o by or under a law of the Commonwealth or of a State or Territory; or

o under the authority of:

* the Commonwealth or the government of a State or Territory; or

* a municipal corporation, another local governing body or a public authority constituted by or under a law of the Commonwealth or of a State or Territory.

To determine whether two untaxed plan cap amounts apply to Fund A and Fund B, it is necessary to consider whether the characteristics of Fund A and Fund B sufficiently result in there being two separate and distinct superannuation schemes.

An important factor to consider in deciding whether two schemes are separate and distinct is whether the rules of each superannuation scheme are self-contained.

In this case, it is noted that Fund A and Fund B were originally established under a state Act (the Act) and were referred to as the 1993 Scheme and the 1987 Scheme respectively with an exclusive set of rules governing both superannuation schemes.

Since the repeal of the Act in 2000, there has been significant change and modification to the law in relation to Fund A and Fund B. Despite these modifications, Fund A and Fund B have continued to maintain separate self-contained rules.

Further, a comparison of the membership rules as to who can become a member of a scheme, rules as to who can make contributions and the amount that can be contributed and benefit rules as to when benefits will be payable and the amount of the benefit payable indicate that Fund A and Fund B each have a set of self-contained rules.

Applying the definitions above, a separate untaxed plan cap applies to both the superannuation lump sum benefits to be received from Fund A and Fund B even though those two superannuation schemes share a common investment fund (Fund C) and were established under the same legislation.

It is considered that Fund A and Fund B are separate public sector superannuation schemes and a separate untaxed plan cap applies to each scheme.

Superannuation benefit components

Lump sum payments made to you from a superannuation fund are called superannuation lump sum benefits, and these benefits will generally comprise:

· a tax free component; and

· a taxable component, which may include both or one of the following:

· an element taxed in the fund; and/or

· an element untaxed in the fund.

Under section 307-210 of the ITAA 1997, your tax free component consists of the crystallised segment and the contributions segment.

Crystallised segment

The crystallised segment includes specific amounts that have accrued in the fund before 1 July 2007. In order to calculate the crystallised segment, the fund first assumes that the full value of a member's superannuation interest (generally any amount, benefit or entitlement which a member holds in a superannuation fund), was paid out just before 1 July 2007. Up to this date, this type of payment would have been called an eligible termination payment (ETP).

The crystallised segment of a superannuation interest is the value of the assumed ETP that would have been paid just before 1 July 2007.

The crystallised segment of a superannuation interest is defined in section 307-225 of the ITAA 1997 as follows:

To work out the crystallised segment of a superannuation interest, first assume that:

· an eligible termination payment had been made in respect of the holder of the interest just before 1 July 2007; and

· the amount of the eligible termination payment had been equal to the value of the interest at that time.

The crystallised segment of the superannuation interest is so much of the value of the interest as consists of the total of the following components of the eligible termination payment:

· the concessional component;

· the post-June 1994 invalidity component;

· the undeducted contributions;

· the CGT exempt component;

· the pre-July 83 component.

For the purposes of paragraph (2)(e), disregard the value of the interest just before 1 July 2007 to the extent that it would consist, apart from this subsection, of the element untaxed in the fund of the taxable component of a superannuation benefit constituted by the eligible termination payment.

In this section, the following terms have the same meaning as in subsection 27A(1) of the Income Tax Assessment Act 1936 (as in force just before 1 July 2007):

· concessional component;

· post-June 1994 invalidity component;

· undeducted contributions;

· CGT exempt component;

· Pre-July 83 component;

· eligible termination payment.

In regards to the crystallised segment and the pre-July 1983 component the explanatory memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2007 states at paragraphs 2.139 to 2.142:

Crystallising the pre-July 1983 component

2.139 Five per cent of the pre-July 1983 component is currently included in a person's assessable income and taxed at marginal rates. The 'pre-July 1983 amount' forms part of the new tax free component, and is therefore tax free for lump sums paid after 1 July 2007 (including commutations of superannuation income streams).

2.140 The mechanism for including the pre-July 1983 amount in the tax free component varies depending on the status of the superannuation interest.

2.141 For most superannuation interests, a pre-July 1983 amount will be calculated as at 30 June 2007 using the existing legislative formula. This amount will become a fixed amount and form part of the tax free component. [Schedule 1, item 1, section 307-225]

2.142 Superannuation providers will have until 30 June 2008 to calculate the crystallised pre-July 1983 segment. Superannuation providers that do not calculate this amount by this date for all affected superannuation interests, are subject to an administrative penalty of 5 penalty units. [Schedule 1, item 23, section 288-105 of the TAA 1953]

Therefore, for most superannuation interests, the pre-July 1983 component will be calculated as at 30 June 2007. Further, superannuation providers had until 30 June 2008 to calculate the crystallised pre-July 1983 component or face an administrative penalty.