Edited version of private ruling

Authorisation Number: 1011781855026

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Ruling

Subject: Superannuation lump sum payments

Questions

1. Can the amount debited against the bank account of the Unit Trust to offset the outstanding bank loan in respect of which a member of a superannuation fund is a guarantor, be treated as a superannuation member benefit to the member?

2. Do the capital gains tax provisions under part 3-1 and part 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997) apply in respect of the sale of the property by the Unit Trust?

3. Is the superannuation fund as the sole unit holder of the Unit Trust presently entitled to the net income of the trust fund for the year the proceeds from the sale of the property are received?

4. Is the trustee of the Unit Trust liable for any tax payable on capital gains made by the Unit Trust in respect of the disposal of the property owned by the Unit Trust?

5. Is the superannuation fund liable for any tax payable on capital gains made by the Unit Trust?

Answers

1. No.

2. Yes.

3. Yes.

4. No.

5. Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Company is the corporate trustee of a complying superannuation fund (the Fund) and is also the trustee for a Unit Trust.

In addition, the Company traded in its own right.

Member A and Member B, who are related, are the sole shareholders and directors of the Company. They are also the sole members of the Fund.

Member A had reached the age of 60 and retired. Member A's funds entered into pension-phase at the start of the 20XX-XX income year.

Member B had also retired and their funds will similarly be in pension phase during the last quarter of the 20XX-XX income year when Member B reached 60 years of age.

During the mid to late 1990s the Fund invested in the Unit Trust. The Fund is the sole unit holder of the Unit Trust.

The Unit Trust, in turn, invested in commercial property and built commercial buildings on the property.

The Company, in its own right, loaned money to the Unit Trust for it to complete the construction.

The Company borrowed money from the Bank. The loans from the Bank to the Company were secured by charges over the Company's assets etc as well as the land and building owned by the Unit Trust. In addition, both Members of the Fund are guarantors of the loan.

The original loan was in 20XX. Due to an addition commercial bill taken, the total of the loan has since increased. The loan plus unpaid default interest totalled more than twice the original loan amount in the end.

The Company leased the premises from the Unit Trust.

The Company was placed into administration by a licensed insolvency practitioner under demand from its major secured creditor, the Bank, in the last quarter of the 2008-09 income year.

In the first quarter of the 20XX-XX income year, the members of the Fund requested that their member accounts in the Fund be changed to an account based pension.

The administrator, after trading the Company, decided to liquidate the assets of the Company as well as other assets held by the Bank as security. That is, the land and buildings owned by the Unit Trust.

The proceeds of the sale of the property, which were somewhat less than the outstanding loan balance, were deposited in the Unit Trust's bank account with the Bank. The proceeds would be in excess of the outstanding loan repayment requirements. As a result, there could be a distribution for the Unit Trust to the Fund as the unit holder.

The administrator and the Bank were also informed that upon disposal of the land and building, more than 50% of the proceeds received by the Unit Trust could be looked upon as a superannuation lump sum member benefit for Member A and then paid to the Bank as a guarantor payment.

The administrator and the Bank were also informed that the remaining amount of the proceeds was not to be paid to the Bank until after Member B reached the age of 60. The applicant stated that the Bank had informally agreed to this and the remaining proceeds were to be held in a deposit account until Member B reached age 60. Despite the informal agreement, the Bank took out the remaining the proceeds as a guarantor payment before Member B reached age 60.

It is confirmed by the applicant that the proceeds deposited in the Unit Trust bank account were debited directly by the Bank to offset the amount of loan that was still outstanding and that no monies ever went into any bank account of the Fund or any bank account of the members. In other words, no payment was ever physically made to the Fund or to Member B.

A copy of both the Unit Trust deed and a replacement trust deed were provided by the applicant.

The relevant clauses of the replacement deed in relation to the unit holders beneficial interests and entitlements to income are as follows:

THE UNITS

The beneficial interest in the trust fund as originally constituted and as existing from time to time shall be vested in the Unit Holders for the time being;

Each unit shall entitle the registered holder thereof together with the registered holders of all other Units to a beneficial interest in the Trust Fund as an entirety but subject thereto shall not entitle a Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof and subject to [a specific clause of the trust deed] no Unit Holder shall be entitled to the transfer to him of any property comprised in the trust fund;

INCOME OF THE TRUST FUND

Subject to any special rights or restrictions provided in the [a specific schedule of the trust deed] in relation to Units of any class the Trustees shall in each Accounting Period until the Vesting Day or the date of the termination of the trust whichever shall first occur pay apply or set aside the net income of the Trust Fund of the Accounting period to or for the benefit of the Unit Holders in proportion to the number of Units of which they are respectively registered as holders at the end of the Accounting Period;

Notwithstanding anything contained in [the preceding clause of the trust deed], the Trustees may with the consent of the holders of a majority of the issued voting Units and subject to any law in force at the time in relation to this Deed so permitting accumulate all or any part of the net income arisen or arising during such period and such accumulation shall be dealt with as an accretion to the Trust Fund but so that the Trustees may at any time or times resort to all such accumulations and pay or apply the whole or any part or parts thereof as if they were income of the Trust Fund;

A determination to pay, apply or set aside any amount for any Unit Holder and the implementation of such determination may be made by:

(a) placing such amount to the credit of the Unit Holders in the books of the Trust Fund; or

(b) by drawing a cheque in respect of such amount made payable to or for the credit or benefit of the unit holder; or

(c) by paying same in Cash to or for the benefit of the Unit Holder; or

(d) by issuing additional Units to the Unit Holder as provided in [a specific clause of the trust deed] hereof; or

(e) by a resolution of the Trustee that a sum out of or portion of the net income of the Trust Fund or the net income as defined by section 95 of the Income Tax Assessment Act 1936 of the Trust Fund for the Accounting Period be paid, applied or set aside to or for the unit holder or otherwise dealt with for the benefit of the Unit Holder AND any resolution of the Trustee as provided in this sub-paragraph shall be irrevocable and the net income of the Trust Fund shall be dealt with as required by the resolution;

The Trustee shall hold so much of the net income of the Trust Fund for each Accounting Period as shall not be the subject of a determination effectively made at or prior to the end of that Accounting Period pursuant to the foregoing provisions of this Clause in trust for the Holders in proportion to the number of Units of which they are respectively registered as Holders on the last day of such Accounting Period.

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Subsection 95(1)
Income Tax Assessment Act 1936 Subsection 95A(2)
Income Tax Assessment Act 1936 Section 97
Income Tax Assessment Act 1936 Section 99
Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1997 Section.6-23
Income Tax Assessment Act 1997 Section 106-60
Income Tax Assessment Act 1997 Section 301-10
Income Tax Assessment Act 1997 Subsection 307-5(1)
Income Tax Assessment Act 1997 Section 307-65
Income Tax Assessment Act 1997 Section 307-70

Reasons for decision

Summary of decision

The superannuation fund is the sole unit holder of the Unit Trust. The proceeds from the disposal of the property in the Unit Trust were deposited in the Unit Trust bank account and were debited directly by the Bank to offset the outstanding loan of the Company. The proceeds were not physically distributed to the sole unit holder.

No payment was ever physically made by the Fund to either of the members of the Fund. Accordingly, the proceeds cannot be considered to be payments of superannuation member benefits.

Nevertheless, it is deemed that the superannuation fund is presently entitled to the net income of the Unit Trust for the year in which the proceeds from the sale of the property are received.

In making this decision, the Commissioner has not considered the following matters under the Superannuation Industry (Supervision) Act 1993:

· the complying status of the fund;

· the in-house asset rules; and

· the non-arm's length dealing of the Fund and the Unit Trust.

Also we have not considered whether the discount method in Divisions 115 of the Income Tax Assessment Act 1997 (ITAA 1997) and the small business CGT concessions in Division 152 may apply in this particular case.

Detailed reasoning

Payment from a superannuation fund

A superannuation lump sum is defined in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70. Superannuation income streams include pensions and annuities.

A superannuation benefit is defined in subsection 307-5(1) of the ITAA 1997. It includes a superannuation member benefit, which is defined in Column 2 of Item 1 of the table set out in that section as:

A payment to you from a superannuation fund because you are a fund member.

Section 301-10 of the ITAA 1997 states that if a taxpayer is over 60 years of age when they receive a taxed superannuation benefit, that benefit is not assessable and is not exempt income.

Section 6-23 of the ITAA 1997 defines non-assessable non-exempt income. This definition affirms that a taxpayer does not have to pay tax on this income, and the payment is not taken into account in the determination of a taxpayer's tax liability. In simple terms it is tax-free.

It should be noted that there is no discretion in the legislation quoted above to allow the Commissioner of Taxation to treat a superannuation lump sum payment received a few days before the person's 60^th birthday as being received after that date. The Commissioner can only exercise, or refuse to exercise, a discretion when he is given that discretion under the legislation he administers.

There are a number of entities involved in this particular case, the Company, the Fund, the Unit Trust and the members of the Fund.

Member A and Member B are sole directors of the Company and sole members of the Fund. The Company is the trustee for both the Fund and the Unit Trust. The Fund is the sole unit holder of the Unit Trust.

As stated in the facts, the Company borrowed money from the Bank and loaned it to the Unit Trust. The loans from the Bank to the Company were secured by charges over the Company's assets etc as well as the land and building owned by the Unit Trust. In addition, both Members of the Fund are guarantors for the loan.

The Company was placed into administration and the administrator liquidated the Company assets as well as the land and building held by the Bank as security.

The proceeds from the sale of the land and building owned by the Unit Trust were deposited in the Unit Trust's bank account with the Bank. The proceeds were then debited directly by the Bank to offset the outstanding loan. The proceeds never physically went into any bank account of the Fund or any bank account of the members of the Fund.

Whether or not the intention was for the proceeds to be looked upon as a superannuation lump sum member benefits for both Member A and Member B is not relevant. What is relevant is that the proceeds were applied directly in satisfaction of the repayment of the outstanding loan, in respect of which Member A and Member B were guarantors.

It is a fact that the Fund has not paid any superannuation lump sum benefit to either member A or Member B in the 20XX-XX income year. Accordingly, the proceeds cannot be considered to be payments of superannuation member benefits.

Capital gains tax (CGT)

Capital Gain on forced sale of security

The CGT provisions apply to an act done by an entity in relation to a CGT asset for the purposes of enforcing or giving effect to a security the entity holds over the asset as if the act had been done instead by the person who provided the security under section 106-60 of the ITAA 1997.

The section gives an example, 'if a lender sells property under a power of sale after the owner of the property fails to make payments on the loan, any capital gain or loss is made by the owner of the property, and not the lender.'

In this case, any capital gain or loss arising from the sale of the property which the Unit Trust offered as security for the loan is made by the Unit Trust.

Present entitlement

Section 97 of the Income Tax Assessment Act 1936 (ITAA 1936) states a beneficiary presently entitled to a share of the income of a trust estate, who is not under a legal disability, is required to include their share of the net income of the trust estate in their income tax return.

The concept of present entitlement determines whether trust income is assessed to the beneficiary or to the trustee. Where no beneficiary is presently entitled to some or all of the net income of the trust estate, the trustee will be assessable for the trust income under sections 99 and 99A of the ITAA 1936.

There is no definition of the term 'presently entitled' in the ITAA 1936 or the ITAA 1997. The principal cases on the concept of present entitlement are the High Court decisions in Federal Commissioner of Taxation v. Whiting (1943) 68 CLR 199 at 210 (Whiting) and Taylor v. Federal Commissioner of Taxation (1970) 119 CLR 444; (1970) 44 ALJR 148; (1970) 1 ATR 582; (1970) 70 ATC 4026 (Taylor). The principles in Taylor are also dealt with in Income Tax Ruling IT 319.

The main principles emerging from Whiting and Taylor are:

· The income must be legally available for distribution to the beneficiary. It does not matter whether the amount of income has not been exactly ascertained.

· The beneficiary must have an indefeasible, absolutely vested, beneficial interest in possession in the trust income. That is, the interest must not be contingent which means that the beneficiary must have the right to demand immediate payment (or would have had the right to demand payment had they not been under a legal disability). An interest is said to be defeasible where it can be brought to an end.

Harmer v. Federal Commissioner of Taxation (1991) 173 CLR 264; (1991) 66 ALJR 89; (1991) 104 ALR 117; (1991) 22 ATR 726; (1991) 91 ATC 5000; [1991] HCA 51 (Harmer) concerned disputed monies which were the subject of the competing claims were paid into Court and then deposited under the names of the claimant solicitors in a building society account to be held on trust pending the Court's determination of the claims. In two particular years prior to the determination of the claims, interest was earned and assessed under section 99A of the ITAA 1936. Both the High Court and Full High Court considered that, as the individual claimants' interests were at best contingent, the claimants were not presently entitled with the ordinary meaning of the term or within subsection 95A(2). Their interest was merely that they could have the funds properly administered and applied.

At the centre of the concept of present entitlement lies the immediate present right of a beneficiary to demand and receive payment of the income of the trust estate or a share of it. Harmer expressed the tests as follows at ATC 5004:

The parties are agreed that the cases establish that a beneficiary is "presently entitled" to a share of the income of a trust estate if, but only if:

(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and

(b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the relevant year of income and whether or not the trustee has the funds available for immediate payment.'

In this case the Unit Trust had offered the property as security in order for the Company to secure a loan. As a result of the Company's subsequent liquidation, the property was disposed of. The proceeds from the disposal were deposited in the Unit Trust bank account and were debited directly by the Bank to offset the outstanding loan of the Company. That income was not physically distributed to the unit holder.

The trust deed for the Unit Trust deals with how the trustee is to treat the income of the trust fund. In particular, a specific clause of the trust deed requires the net income of the trust fund to be paid, applied or set aside for the benefit of the unit holders in proportion to their unit holdings. While another clause of the trust deed allows the trustee to accumulate the income provided they have obtained consent from the unit holders.

The trust deed also outlines when it is considered that the trustee has paid, applied or set aside an amount for a Unit Holder.

If at the end of the accounting period the trustee has not made an effective determination then, subject to a specific clause of the trust deed, the trustee is required to hold in trust so much of the net income not subject to an effective determination for the unit holders in proportion to their unit holding.

A presently entitled trust beneficiary will remain as such, whether or not the trustee has the funds available for immediate payment. It is not known if the trust has recorded any distributions in the trust accounts or whether any accounts had been prepared. In any case, where no determination has been made, the specific clause of the trust deed requires the trustee to hold the amounts in trust for the unit holders in proportion to their unit holding. Consequently, the Fund, as sole unit holder, is presently entitled to the net income of the trust fund for the year the proceeds from the sale of the property are received.

CGT event

The net income of a trust estate includes the total assessable income of the trust estate calculated as if the trustee were a taxpayer in respect of that income (subsection 95(1) of the ITAA 1936). The net income is assessed to a beneficiary or to the trustee depending on whether the beneficiary is presently entitled to income of the trust estate or is under a legal disability.

CGT event A1 happened when the property was disposed of by the unit trust, and it is the unit trust that made the capital gain. The unit trust is required to include any capital gain that is not otherwise reduced, deferred or disregarded in the net capital gain and net income for the income year. As any capital gain will be distributed to the Fund, which is a resident unit holder, the Unit Trust will not pay CGT on any capital gain resulting from the disposal of the property.

The amount of the net capital gain included in the share of net income distributed to the Fund will be treated as a capital gain in the hands of the Fund, and will be included in the assessable income of the Fund.