Edited version of administratively binding advice

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Notice of private ruling

Subject: Assessability of payment from trustee of an industry superfund

Questions:

Is a compensation payment to be made to you by the trustee of an industry superannuation fund to be included in your assessable income?

Is the proposed compensation payment a superannuation lump sum benefit under section 307-65 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answers:

Yes

No

This private ruling applies for the following period:

30 June 2012

The arrangement commences on:

1 July 2011

Notice of advice

Question

If you contribute the amount of the proposed compensation payment to a complying superannuation fund will it be count towards your non-concessional contributions cap?

Advice

Yes

This advice applies for the following period:

30 June 2012

The arrangement commences on:

1 July 2011

Relevant facts and circumstances

You are over 50 and under 75 years of age and work full time for an employer.

You have been a member of a superannuation fund (the Fund) for more than twenty years.

Recently you realised that the Fund had been using a new conversion factor to calculate your defined benefit entitlement.

You consider that the use of the new conversion factor is detrimental to you, therefore, you challenged the Fund.

The Fund refused to change their method of calculation of your superannuation benefits.

You lodged a complaint against the Fund with the Superannuation Complaints Tribunal (SCT).

The SCT conducted a conciliation conference (the conference) with the Fund and the Fund offered a lump sum conciliation payment. The Fund indicated that the compensation payment will be made outside the superannuation environment. You did not accept the offer at the conference.

The SCT conciliator had further consultations with the Fund, after which the SCT conciliator advised you that:

The offer made at the conference was still valid, but the Fund was not prepared to increase its value.

The payment would only be a lump sum outside the superannuation environment.

Continuation of the SCT process (failure of conciliation) may take another nine months to resolve.

The SCT conciliator accepted that you would seek an advice from the Tax Office on the taxation of the lump sum offered.

In a recent email from the SCT conciliator advised you:

· of the proposed compensation amount

· that the payment is proposed to be paid by the Trustee's company and not the Fund

· that this settlement is intended to be paid out of the superannuation system as a direct payment to you by the Trustee.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 292-20.

Income Tax Assessment Act 1997 Subsection 292-20(2).

Income Tax Assessment Act 1997 Section 292-80.

Income Tax Assessment Act 1997 Section 292-80.

Income Tax Assessment Act 1997 Subsection 292-85(2).

Income Tax Assessment Act 1997 Section 292-90.

Income Tax Assessment Act 1997 Paragraph 292-90(2)(c).

Income Tax Assessment Act 1997 Section 292-100.

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.

Income tax (Transitional Provisions) Act 1997 Section 292-20

Income tax (Transitional Provisions) Act 1997 Subsection 292-20(1).

Reasons for decision

Summary

The lump sum compensation payment to be paid to you will not be a superannuation lump sum benefit. This is because the payment is not being paid by trustee of the Fund in its capacity as trustee of the superannuation fund. The compensation payment is being paid by Trustees company in its own right.

The compensation payment is assessable income in your hands, as a capital gain. Your right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged. As your right to seek compensation was acquired after 20 September 1985, the capital gains tax provision will apply.

If you contribute the compensation payment to a complying superannuation fund, it will be counted towards your non-concessional contributions cap provided you did not claim the contributions as a deduction for personal superannuation contributions.

Detailed reasoning

A compensation receipt, or compensation, includes any amount (whether money or other property) received by a taxpayer in respect of a right to seek compensation or a cause of action, or any proceeding instituted by the taxpayer in respect of that right or cause of action, whether or not:

· in relation to any underlying asset;

· arising out of Court proceedings; or

· made up of dissected amounts.

Acquisition of an asset

A right to seek compensation is not acquired as a result of any disposal by the grantor (i.e., the trustee) of the right to the grantee (i.e., you). Rather, the right to seek compensation is vested in the grantee by operation of law (per McHugh J in Hepples v. Federal Commissioner of Taxation (No 2) (1991) 65 ALJR 650; (1991) 102 ALR 497; (1991) 22 ATR 465; (1991) 91 ATC 4808).

The right to seek compensation is the right of action arising at law or in equity and vesting in the taxpayer on the occurrence of any breach of contract, personal injury or other compensable damage or injury. The right to seek compensation is acquired at the time of the compensable wrong or injury, and includes all of the rights arising during the process of pursuing the compensation claim. The right to seek compensation is disposed of when it is satisfied, surrendered, released or discharged.

Therefore, the right to seek compensation was acquired at the time of the compensable wrong which for you was the date the calculation rules of the fund changed in 2005.

As the right to seek compensation was acquired after 20 September 1985, the CGT provisions will apply.

Disposal of the right to seek compensation

If an amount of compensation is not received in respect of any underlying asset, the amount received relates to the disposal by the taxpayer of the right to seek compensation.

The right to seek compensation is disposed of when the taxpayer agrees to a release, discharge or surrender of his or her right to seek compensation. Therefore, the date you enter into a settlement or deed of release with the superannuation trustee, is the date you dispose of your right; accordingly your capital gain will be assessable in that financial year

Superannuation lump sum benefits

The taxation treatment of a superannuation benefit received by a taxpayer from a complying superannuation fund as from 1 July 2007 under Division 301 of the Income Tax Assessment Act 1997 (ITAA 1997) may vary depending on:

· whether the benefit is a superannuation lump sum;

· a superannuation income stream;

· the age of the member when the benefit is received;

· the components of the superannuation benefit, (tax-free component or taxable component);

· whether the superannuation benefit contains an element untaxed in the fund; and

· the amount of the benefit (where relevant caps apply).

The table contained in subsection 307-5(1) of the ITAA 1997 lists various types of superannuation benefits. One type of superannuation benefit is a superannuation fund payment. Item 1 of the table states that a superannuation fund payment will be a superannuation member benefit if it is:

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

Superannuation lump sum is defined in section 995-1 of the ITAA 1997 as follows:

superannuation lump sum has the meaning given by section 307-65.

The meaning of superannuation lump sum under section 307-65 of the ITAA 1997 is:

A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (see section 307-70).

Consequently, in order for your proposed compensation payment to be considered as a superannuation lump sum benefit it must be paid by a superannuation fund.

In this case, the facts show that you lodged a complaint against the the Fund with the Superannuation Complaints Tribunal (SCT).

In order to settle the complaint, the trustees of the Fund, the Trustee Compnay, have offered you a compensation payment. The compensation payment is intended to be paid outside of the superannuation system as a direct payment to you. The compensation payment will be made by the Trustee Company in its own right and not in its capacity as trustee of the Fund.

The email you received from the SCT councillor confirmed that the compensation payment will be paid by the Trustees Company outside of the superannuation system.

Based on the above, the compensation payment is clearly not made by the Fund. Accordingly, it is not a superannuation lump sum in accordance with subsection 307-5(1) of the ITAA 1997.

Concessional contributions

Concessional contributions made to superannuation funds are subject to an annual cap. For the 2011-12 income year the annual cap is $25,000. Because you are over 50 years of age, a transitional concessional contributions cap of $50,000 will apply.

Concessional contributions include:

· contributions made by an entity other than the member, including employers and other arm's length parties;

· personal contributions for which a deduction is claimed by the member;

· but do not include 'spouse contributions' as defined in section 295-165 of the ITAA 1997.

If the proposed compensation payment was paid into the Fund by the Trustee Company it would, as a contribution by a third party, it would be a concessional contribution.

If you direct the fund to make the payment into the Fund on your behalf, however, it will be a personal contribution, and may be either concessional or non-concessional.

Amounts in excess of the concessional contributions cap are also counted towards the non-concessional contributions cap.

Concessional contributions are included in the assessable income of a complying superannuation fund and subject to a tax rate of 15%.

Non-concessional contributions

Non-concessional contributions for a financial year are defined in section 292-90 of the ITAA 1997 and include:

· personal contributions for which an income tax deduction is not claimed;

· contributions a person's spouse makes to their superannuation fund account;

· transfers from foreign superannuation funds (excluding amounts included in the fund's assessable income); and

· excess concessional contributions (if any) for the financial year.

Non-concessional contributions are also subject to an annual cap in accordance with subsection 292-85(2) of the ITAA 1997. For the 2011-12 income year the annual cap is $150,000.

Excess contributions

Amounts in excess of either the concessional or non-concessional contributions cap are both subject to excess contributions tax.

A person will be liable to pay excess non-concessional contributions tax at the rate of 46.5% on non-concessional contributions over the cap (sections 292-80 and 292-85 of the ITAA 1997). The member will be required to ask their superannuation fund to release an amount that is equal to the tax liability.

A person will be liable to pay excess concessional contributions tax at the rate of 31.5% on concessional contributions over the cap (sections 292-15 and 292-20 of the ITAA 1997). The member can ask their superannuation fund to release an amount that is equal to the tax liability (section 292-410 of the ITAA 1997).