Edited version of your private ruling

Authorisation Number: 1012044042819

This edited version of your administratively binding advice and ruling will be published in the public register of private binding rulings after 28 days from the issue date of the advice and ruling. The attached administratively binding advice and private rulings fact sheet ha more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Subject: Additional superannuation payments

Notice of advice

Issue 1

Questions:

1. Will the payments made by the current employer to the superannuation fund to meet its obligations under a pre-existing superannuation payment plan (SPP) for the benefit of the Employees be concessional contributions?

2. Will Subdivision 292-D of the Income Tax Assessment Act 1997 (ITAA 1997) apply instead to the SPP?

The Commissioner is unable to rule on questions 1 and 2 but has provided administratively binding advice.

The Taxation Administration Act 1953 (TAA) is the law that allows legally binding advice to be provided on certain laws administered by the Commissioner. Unfortunately we are not able to provide a private ruling on an issue in relation to the concessional contributions contained in the provisions in Division 292 of the Income Tax Assessment Act 1997 (ITAA 1997) as the TAA does not allow advice on that issue to be provided in a legally binding form.

The Commissioner will, in limited circumstances, provide administratively binding advice in relation to these laws and in relation to a limited range of other circumstances. If taxpayers rely on advice specified as administratively binding advice and it is later found to be incorrect, they will ordinarily not have to pay the tax that would otherwise be payable under the law, shortfall penalty and interest charges.

Advices:

1. Yes

2. No

Notice of private ruling

Issue 2

Questions:

1. Will the current employer need to report the SPP payments as reportable employer superannuation contributions?

2. Will the current employer be entitled to a tax deduction under section 290-60 of the ITAA 1997 for the SPP payment?

3. Will the SPP payments be directed termination payments, and if so:

a) will the current employer be required to issue transitional termination payment pre-payment statements and directed termination payment statements in respect of the SPP payments it makes to the superannuation fund?

b) is it necessary in the circumstances for the Employees to still complete transitional termination payment pre-payment statements in the approved form for the SPP to be treated as directed termination payments?

4. Will the answers to any of the above questions change if the SPP obligation is met by the superannuation fund allocating surplus held in reserve to the accounts of the two employees?

Answers:

1. No

2. Yes

3. No

4. Yes, the answer to some questions will change if the SPP obligation is met by the superannuation fund allocating surplus held in reserve to the accounts of the two employees.

This administratively binding advice and ruling apply for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

1. The ruling application concerns superannuation benefits for two employees of the current employer, Mr A and Mr B (the Employees).

2. Prior to the their employment with the current employer each employee was both an employee of Company A and a defined benefit member of the Company A Provident Fund (Fund A).

3. Fund A converted into an accumulation fund.

4. At the time of the conversion Company A management introduced a SPP. Under the SPP, Company A management guaranteed to the existing employees that their lump sum superannuation retirement benefits would be at least equal to the amount calculated under the defined benefit formula, and that their superannuation accounts would be topped-up to the extent of any shortfall.

5. The SPP formed part of the contract of the employment for the employees, but was not referred to in the Fund A trust deed.

6. Later:

(a) Company A and Company B merged;

(b) Fund A and Company B Superannuation Plan (Fund B) merged to form a new Superannuation Plan (Fund C) with two divisions established, being the Fund A Division and the Fund B Division; and

(c) the employment of the Employees was transferred to Company B.

7. Company B adopted the SPP but it was not referred to in the Fund C trust deed. You have advised the Fund C trustee did set out the SPP terms in a booklet prepared for Fund A Division members however a copy of that booklet cannot be located.

8. The current employer purchased Company B's business and the employment of the Employees was transferred to the Current Employer.

9. Later that same year, the Managing Director of the current employer wrote to each employee covered by the SPP confirming:

§ The SPP entitlement as a term of employment but with payment conditional upon the employee transferring their Fund C superannuation account balance to another Superannuation Plan (Fund D);

§ The prescribed method for calculating the minimum superannuation account balance upon retirement below which a top-up payment under the SPP would be required;

§ There was very little likelihood of the SPP needing to be called upon; and

§ Any top up of benefits required as a result of the SPP will be provided through the Fund D.

10. Subsequently Fund D became a division of Fund E under a successor fund transfer. Fund E is a large APRA regulated complying superannuation fund.

11. The Employees will retire during the 2011-12 income year. They will not be re-employed by the current employer.

12. Due to poor investment returns over the past few years, the Employees' Fund D superannuation account balances at retirement will fall short of the minimum guaranteed under the SPP. As such, the current employer will be obligated to top-up the Employees' Fund D superannuation accounts under the terms of the SPP.

13. To enable the required account balances under the SPP to be reached, the current employer will during the 2011-12 income year either:

(a) make payments to Fund D under the terms of the SPP for the benefit of the Employees; or

(b) alternatively, request that Fund D apply part of the fund's actuarial surplus for the benefit of the Employees.

14. The current employer is obligated to top-up the Employees' Fund D superannuation accounts under the terms of the SPP. The SPP require the top-up monies to be paid by the Current employer to Fund D. The contractual terms do not provide for the top-up monies to be paid directly to the Employees.

15. The required top-up amount received by Fund D will also be credited to the Employee's respective superannuation accounts during the 2011-12 income year.

16. The employees Mr A is aged 55 and Mr B is over 55 and under the age of 60.

17. Neither employee has previously received any transitional termination payments.

18. No monies have been set aside to fund the SPP.

19. In a recent email from the entity's representative it was advised that the Company C Division of the Fund E's trust deed contains an accumulation sub-fund and a defined benefits sub-fund which, in turn, has Division A and Division B membership. The company C Division is a defined benefit sub-fund in terms of the SIS Regulations because it has at least one defined benefit member.

20. In the same email it was advised that:

1. Both employees concerned are members of the Accumulation Sub-fund (appreciating of course that there is also the defined SPP top-up which is a contractual entitlement).

2. By way of broad general description of the history, the Accumulation Sub-fund was originally the Fund A that converted from defined benefit to accumulation style benefits in 1991. To reiterate from the ruling application, Compnay A provided the SPP for those members who were employed in 1991. Therefore it only applies to members of the Accumulation Sub-fund. As mentioned in the ruling application, these are the last two employees with this SPP entitlement originating from 1991.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 82-130.

Income Tax Assessment Act 1997 Subsection 82-130(1).

Income Tax Assessment Act 1997 Subsection 82-135.

Income Tax Assessment Act 1997 Subsection 290-60(1).

Income Tax Assessment Act 1997 Section 290-70.

Income Tax Assessment Act 1997 Section 290-75.

Income Tax Assessment Act 1997 Section 290-80.

Income Tax Assessment Act 1997 Subsection 292-25(2).

Income Tax Assessment Act 1997 Subsection 292-25(3).

Income Tax Assessment Act 1997 Section 295-155.

Taxation Administration Act 1953 section 16-182 of Schedule 1

Reasons for decision

Summary

Payments made by the current employer to a relevant superannuation fund for the benefit of the Employees to meet its obligations under the superannuation payment plan (SPP) will be concessional contributions.

Subdivision 292-D of the Income Tax Assessment Act 1997 will not apply to the payments because Employees do not have a superannuation interest that is or includes a defined benefit interest.

The current employer will not need to report the payments as reportable employer superannuation contributions.

The current employer will be entitled to a tax deduction under section 290-60 of the ITAA 1997 for the payments.

The payments will not be employment termination payments as the payment are not received in consequence of the termination of the Employees' employment but in consequence of being members of the relevant superannuation fund. As the payments are not employment termination payments, the payment cannot be transitional termination payments and, hence, directed termination payments.

Detailed Reasoning

Are the payments concessional contributions?

In accordance with subsection 292-25(2) of the Income Tax Assessment Act 1997 (ITAA 1997), concessional contributions are contributions made in the financial year to a complying superannuation plan by, or for, an individual where they are included in the assessable income of the superannuation provider.

Section 295-155 of the ITAA 1997 provides that, with certain additions and exceptions, three types of contributions are included in the assessable income of the superannuation provider:

i. those made by a contributor (for example, an employer) to provide superannuation benefits for someone else (except a contribution that is a roll-over superannuation benefit);

ii. those made on the contributor's own behalf for which the contributor is entitled to a deduction; and

iii. those transferred from a foreign superannuation fund to an Australian superannuation fund

The term 'contribution' is not defined in the ITAA 1997, therefore, its meaning is to be determined according to its ordinary meaning having regard to the context in which it appears.

Taxation Ruling TR 2010/1 explains the Commissioner's views as to the ordinary meaning of the word 'contribution' in so far as 'contribution' is used in relation to a superannuation fund, approved deposit fund or retirement savings account in the ITAA 1997.

At paragraph 4 of TR 2010/1 it is stated:

In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

Paragraph 7 states:

A person's purpose is the object which they have in view or in mind. Generally, a person will be said to intend the natural and probable consequences of their acts and likewise their purpose may be inferred from their acts. This is a determination of a person's objective purpose, not their subjective intention.

In this case, the payments are to be made by an employer to a superannuation fund for the benefit of two particular employees (to ensure the employees are not disadvantaged by transferring to the accumulation fund) and the payments will increase the capital of the fund. Therefore, payments made by the current employer to the superannuation fund will be concessional contributions.

Does Division 292-D apply to the payments?

Division 292-D of the ITAA 1997 applies to members that have:

(a) a superannuation interest that is or includes a defined benefit interest; or

(b) more than one superannuation interest that is or includes a defined benefit interest.

The Employees are members of an accumulation plan and do not have an interest that is, or includes a defined benefit interest in the plan, therefore Division 292-D of the ITAA 1997 does not apply to them or their benefits.

Are the payments reportable employer superannuation contributions?

Definition of reportable employer superannuation contributions (RESC) is found in subsection 16-182(1) of Schedule 1 of the Taxation Administration Act 1953 (TAA) which states that a RESC, for an individual for an income year, is an amount contributed:

(a) by an employer of the individual, or an associate of the employer, for the individual's benefit in respect of the income year; and

(b) to a superannuation fund or an RSA;

to the extent that either or both of the following paragraphs apply:

(c) the individual has or has had, or might reasonably be expected to have or have had, the capacity to influence the size of the amount;

(d) the individual has or has had, or might reasonably be expected to have or have had, the capacity to influence the way the amount is contributed so that his or her assessable income is reduced.

There are certain types of contributions that are specifically mentioned as exceptions to RESC in the Explanatory Memorandum to Tax Laws Amendment (2009 Measures No.1) Bill 2009 which introduced section 16-182 of Schedule 1 to the TAA. These include contributions mandated by law, as the employee will have no influence over them.

Amounts that the employer is not required to make under law may also not be RESC, provided the employee does not, and could not, influence the amount. For instance, if the employer is required to contribute amounts in accordance with an industrial award or an agreement it has with all employees, they will not be RESC as the individual employee can not influence the amount of the contribution.

Payments by the current employer are to be made in accordance with the SPP which was negotiated with and formed part of the contract of employment of all the employees at the time of the conversion - the two employees themselves did not/could not influence the size of the payments. Therefore, the payments do not meet the definition of RESC.

Will the current employer be entitled to a tax deduction for the payments?

In accordance with subsections 290-60(1) of the ITAA 1997, an employer can deduct a contribution made to a complying superannuation fund for the purpose of providing superannuation benefits for a person who is an employee of the employer when the contribution is made.

However, subsection 290-60(2) of the ITAA 1997 states that to claim the deduction, the conditions in section 290-70, 290-75 and 290-80 must also be satisfied.

In this case, all the conditions for deductibility mentioned above appear to be met, therefore, the current employer may claim a deduction for the payments.

Will the payments be transitional/directed termination payments?

To be a transitional/directed termination payment a payment must first meet the definition of employment termination payment.

In accordance with subsection 82-130(1) of the ITAA 1997, an employment termination payment is a payment that is:

(a) received by a person in consequence of the termination of their employment, or after another person's death, in consequence of the termination of the other person's employment;

(b) it is received no later than 12 months after the termination; and

(c) is not a payment mentioned in section 82-135 of the ITAA 1997 as not being an employment termination payment.

Section 82-135 of the ITAA 1997 specifically excludes superannuation benefits (lump sums or income streams) from the definition of employment termination in section 82-130 of the ITAA 1997.

The meaning of the phrase 'in consequence of' in the context of the expression 'in consequence of the termination of any employment' is considered in Taxation Ruling TR 2003/13. The Commissioner considers that a payment is made in respect of a taxpayer in consequence of the termination of the employment of the taxpayer if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been made to the taxpayer.

Based on the above, payments made by the current employer are not employment termination payment because:

(a) the payments are superannuation benefits which are specifically excluded from the definition of an employment termination payment by section 82-135 of the ITAA 1997; and

(b) the payments are not received in consequence of the termination of the Employees' employment but in consequence of being members of the relevant superannuation fund.

As the payments are not employment termination payments, the payment cannot be transitional termination payments and, hence, directed termination payments.

Allocation of the fund's surplus to the Employees

Generally an amount that is allocated from a reserve will be a concessional contribution unless it meets the conditions outlined in subregulation 292-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR).

In accordance with subregulation 292-25.01(4) of the ITAR, the first condition is that the amount is allocated to all members of the fund, or class of members to which the reserve relates, on a fair and reasonable basis.

In determining what is fair and reasonable it is necessary to have regard to members' proportionate interests in the superannuation plan. It would ordinarily be expected that the allocation would be in proportion to the existing interests of the members, so that particular members are not favoured over others. Allocations for the financial year that are less than 5% of the value of the member's interest in the superannuation plan at the time the allocation is made will not be included as a concessional contribution (Income Tax Assessment Amendment Regulations 2007 (No. 3) Explanatory Statement).

Based on the information provided, if SPP payments were made from the fund's reserve they would be concessional contributions because they would not be paid to all the members of the fund (in this instance only to Mr A and Mr B); the Employees are not a class of members to which the reserve relates; and the amount that is allocated would be more than 5% of the value of the Employee's interest.

Division 292-D of the ITAA 1997 does not apply because Employees do not have a superannuation interest that is or includes a defined benefit interest.

The current employer does not need to report the contributions as RESC for the reasons given previously.

The current employer would not be able to deduct the payments because they [the current employer] are not making the contribution.

The payments are not directed termination payments for the reasons already stated above.