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Ruling

Subject: Non-arm's length income

Question 1

Are assets supporting superannuation income streams paid by the Superannuation fund (the Fund) segregated current pension assets of the Fund for the purposes of subsection 295-385 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

During the year ended 30 June 2012

Relevant facts and circumstances

The Fund is a complying self managed superannuation fund

The Fund has 3 members with Member 1 and Member 2 being over 65 years of age.

As at 30 June 2011, assets of the Fund comprised of:

Listed shares	$F
Cash at banks	$G
Property A (60% ownership)	$H
Property B (60% ownership)	$I
Property C (60% ownership)	$J
Property D (60% ownership)	$K
Property E (50% ownership)	$L
Rental properties chattels	$M

In July 2011, the Fund commenced paying account based pensions to Member 1 and Member 2.

To fund the pension liabilities, properties A, B and C (the Properties) were converted into account based pensions with market value of $450,000 to support the payment of two superannuation income streams ($225,000 each).

Sometime in May/June 2012, the Properties were sold.

It is stated that as of July 2011, pension assets were set aside and:

(a) transactions relating to the Properties were dealt only with other pension accounts (eg, pension bank accounts); and

(b) new bank accounts were opened to accommodate only the pension transactions:

i. deposits of rental income from the Properties (July 2011 - May 2012)

ii. deposit of the net sale proceeds

iii. pension withdrawals

iv. holding of cash available for future pension investments (eg, share acquisition).

The balance of the Fund's assets has remained in the accumulation accounts for the members.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-385

Income Tax Assessment Act 1997 Subsection 295-385(1)

Income Tax Assessment Act 1997 Subsection 295-385(3)

Income Tax Assessment Act 1997 Subsection 295-385(4)

Income Tax Assessment Act 1997 Section 295-390

Income Tax Assessment Act 1997 Subsection 295-390(3)

Income Tax Assessment Act 1997 Subsection 295-390(4)

Income Tax Assessment Act 1997 Subsection 295-390(5)

Income Tax Assessment Act 1997 Subsection 295-390(6)

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

Income Tax Assessment Regulations 1997 Regulation 295-385.01

Reasons for decision

As assets (the Properties) are owned by the Fund and another entity jointly, they cannot be segregated as assets to be used exclusively for the purpose of discharging all or part of the Fund's liabilities in respect of the superannuation income stream benefits that are payable by the Fund. This is because it is not possible to invest, hold in reserve, or deal with only a portion of Properties.

Therefore the Properties are not segregated current pension assets of the Fund for the purposes of section 295-385 of the ITAA 1997.

Detailed reasoning

In accordance with subsection 295-385(1) of the Income Tax Assessment Act 1997 (ITAA 1997), an amount that would otherwise be assessable ordinary income or statutory income of a complying superannuation fund for an income year is exempt from income tax to the extent that it is from 'segregated current pension assets'.

'Segregated current pension assets' are defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 295-385 of the ITAA 1997.

Assets of a complying superannuation fund may be segregated current pension assets under either subsection 295-385(3) or subsection 295-385(4) of the ITAA 1997.

Under subsection 295-385(3) of the ITAA 1997 assets of a fund will be segregated current pension assets if, at a time,

(a) the assets are invested, held in reserve or otherwise dealt with at that time solely to enable the fund to discharge all or part of its liabilities (contingent or not) in respect of *superannuation income stream benefits that are payable by the fund at that time; and

(b) the trustee of the fund obtains an *actuary's certificate before the date for lodgment of the fund's *income tax return for the income year to the effect that the assets and the earnings that the actuary expects will be made from them would provide the amount required to discharge in full those liabilities, or that part of those liabilities, as they fall due.

To be a segregated current pension asset under subsection 295-385(4), the asset must be

invested, held in reserve or otherwise being dealt with at that time for the sole purpose of enabling the fund to discharge all or part of its liabilities (contingent or not), as they become due, in respect of *superannuation income stream benefits:

(a) that are payable by the fund at that time; and

(b) prescribed by the regulations for the purposes of this section.

Regulation 295-385.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) provides that the following superannuation income streams benefits are prescribed for the purposes of section 295-385 of the ITAA 1997:

a) an allocated pension;

b) a market linked pension; and

c) an account-based pension.

However, subsection 295-385(4) will not apply unless, at all times during the income year, the liabilities of the fund (contingent or not) to pay superannuation income stream benefits payable by the fund were liabilities in respect of income stream benefits prescribed by the regulations (subsection 295-385(5) of the ITAA 1997).

Further, under subsection 295-385(6) of the ITAA 1997, assets supporting superannuation income stream benefits being paid as allocated pensions, market-linked pensions or account-based pensions, will not be considered 'segregated current pension assets' to the extent that the value of those assets exceeds the market value of the account balance or balances supporting those income stream benefits.

Meaning of 'segregated'

The term 'segregated' is not defined in the ITAA 1997 therefore, it should be given its plain and ordinary meaning.

According to the Macquarie dictionary 'segregated' means to

'set apart'; and to 'segregate' is to 'to separate or go apart; separate from the main body and collect in one place; become segregated'. …';

Therefore, assets of a complying superannuation fund will be 'segregated' current pension assets of the fund if they are kept separate and apart from other assets of the fund solely to enable the fund to discharge all or part of its liabilities in respect of superannuation income stream benefits that are payable by the fund at that time.

The term 'solely' is also not defined in the ITAA 1997 therefore, it is given its plain and ordinary meaning.

The meaning of 'solely' has been considered in a number of cases where it has been held that, in its ordinary meaning, the word 'solely' means 'only' or 'to the exclusion of all else'.(Lloyd v FC of T (1955) 93 CLR 645 at 671; CASE 16/2000 [2000] AATA 1080; Oram v. Department of Employment, Education, Training & Youth Affairs (1996) 43 ALD 369).

Based on the above, where, as in the case of the Fund, a property is owned in part only, it is not possible to segregate that property as an asset or assets to be used solely or exclusively for the purpose of meeting the Fund's pension liabilities. This is because it is not possible to invest, hold in reserve or deal with only a portion of the property.

Therefore, the Properties are not segregated current pension assets of the Fund for the income year ended 30 June 2012.

Accordingly, section 295-385 of the ITAA 1997 does not apply to exempt from tax income from these assets. Instead, the proportion of income from these assets that is exempt from tax should be calculated in accordance with section 295-390 of the ITAA 1997, that is, as income from other assets used to meet current pension liabilities.

The proportion that is exempt from tax is calculated in accordance with the formula under subsection 295-390(3) which states:

The Proportion is:

Average value of current pension liabilities

Average value of superannuation liabilities

where:

average value of current pension liabilities is the average value for the income year of the funds current liabilities (contingent or not) in respect of superannuation income stream benefits that are payable by the fund in that year. This does not include liabilities for which segregated current pensions are held.

average value of superannuation liabilities is the average value for the income year of the funds current and future liabilities (contingent or not) in respect of superannuation income stream benefits in respect of which contributions have, or were liable to have been made. This does not include liabilities for which segregated current pension assets or segregated non current assets are held.

The value of the components in the formula above is the average value during the year of income but is subject to valuation rules in subsections 295-390(4), (5) and (6) of the ITAA 1997.