Edited version of administratively binding advice

Authorisation Number: 1012474281784

Advice

Subject: Concessional contributions - allocation from reserve

Question

Will any excess funds resulting from the completion of a fixed term defined benefit pension be a concessional contribution if it is allocated to a member of the self managed superannuation fund to commence an account based pension?

Advice

Yes.

This advice applies for the following period

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

The superannuation fund (the Fund) is a complying ATO Regulated Self-Managed Superannuation Fund.

Each member of the Fund is in receipt of an account based pension and a complying pension.

Member 1's complying pension is a fixed-term defined benefit pension (the Pension) which expired in the 20XX-YY income year.

The residual capital value of the Pension was supposed to be $0, however, the account still has a value when the Pension expired in the 20XX-YY income year.

Upon receipt of an actuarial certificate for the 20QQ-XX income year it was advised that the residual amount of the Pension will transfer to a reserve account upon the completion date and the Fund may request a ruling to commence a new account based pension from that date. Further advice was received that there may be an option to commute the current account based pension and recommence a new account based pension with the additional reserve amounts.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 292-25(1)

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

Income Tax Assessment Act 199 Subsection 292-25(3)

Income Tax Assessment Regulations 1997 Regulation 292-25.01

Income Tax Assessment Regulations 1997 Subregulation 292-25.01(4)

Income Tax Assessment Regulations 1997 Paragraph 292-25.01(4)(a)

Income Tax Assessment Regulations 1997 Paragraph 292-25.01(4)(b)

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(7)

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(7) (f)

Further issues for you to consider

Not applicable.

Reasons for decision

Summary

If the trustee of the Fund allocates an amount, from the money previously set aside to provide a pension, to a member of the Fund, then:

(a) it will form part of that member's concessional contributions for the purposes of excess contributions tax in the year it is allocated; and

(b) that member may be liable for excess contributions tax.

Detailed reasoning

Can a pension that meets the standards under subregulation 1.06(7) of the Superannuation Industry (Supervision) Regulations 1994 have a residual capital value?

Pensions that commenced to be paid before 20 September 2007 and are provided under rules of a superannuation fund that meet the standards of either subregulation 1.06(2), 1.06(7), or 1.06(8) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) are commonly referred to as 'complying pensions'.

Pensions provided under rules of a superannuation fund that meet the standards of subregulation 1.06(7) of the SISR are specifically referred to as 'fixed term complying pensions'.

Under paragraph 1.06(7)(f) of the SISR, the rules of a pension must, in order to meet the standards of subregulation 1.06(7) of the SISR, ensure that the pension does not have a residual capital value. In this particular case, the trust deed of the Nurses Specialling Bureau Pty Ltd Superannuation Fund (the Fund) shows that the pension in question was a fixed-term complying pension paid under subregulation 1.06(7) of the SISR. Given this, the pension in question cannot have a residual capital value.

While the Fund may have had money 'set aside' to ensure that it could meet its obligations during the life of the pension (and there was an amount remaining after the pension ceased), this amount cannot be considered a residual capital value, as it is not allowable under the regulations governing the pension.

The amount allocated to support the fixed term complying pension was always in a reserve. This is regardless of how this money was reported or labelled within the Fund's reporting. The trust deed of a superannuation fund will generally state whether or not a reserve can be established inside that particular fund and what the trustee can use that reserve for.

Amounts held in a reserve are not attributable to a specific member, rather it is money that the superannuation fund has set aside to ensure that it can meet its specific financial obligations for the purpose for which the reserve was established.

When a pension ceases, any amount held in reserve supporting this pension is no longer connected to an income stream and cannot be considered to be benefits of the member whose pension the amount supported.

Thus, whilst the 'excess' monies may have been referred to as 'residual capital value' these monies form a reserve.

Excess Contributions Tax Implications

According to section 292-5 of the Income Tax Assessment Act 1997 (ITAA 1997) the object of Division 292 of the Act (concerning excess contributions tax) is to ensure the amount of concessionally taxed superannuation benefits a person receives results from contributions made gradually over the course of the person's life. Unless specifically excluded, contributions made by, or in respect of, an individual are intended to be counted as a contribution. Whether an amount is considered to be a concessional or non-concessional contribution depends on whether the contribution is included in the fund's assessable income.

Under subsection 292-25(1) of the ITAA 1997, the amount of an individual's concessional contributions for a financial year also includes any amount allocated (in that year) by a trustee of a fund, for the individual, in accordance with the conditions specified in the regulations (subsection 292-25(3)).

Subregulation 292-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR 1997) provides that an amount allocated from a reserve is covered under subsection 292-25(3) of the ITAA 1997 unless one of the exceptions apply.

The Commissioner's view is that the term 'reserve', as used in regulation 292-25.01 of the ITAR 1997 should be given a broad meaning to maintain the integrity of the contributions caps.

As discussed above, in this case the 'reserve' always existed to support the fixed term complying pension. In addition, you have stated that the 'residual amount' was to be transferred to a reserve upon the completion date of the pension. We therefore need to consider whether any of the exceptions listed in subregulation 292-25.01(4) of the ITAR 1997 would apply if an amount was allocated from this reserve to one or more of the members.

One of the exceptions that should be considered on the current facts of this case is paragraph 292-25.01(4)(b) of the ITAR 1997. Subparagraph (i) of that provision states that an amount allocated from a reserve will not fall under subsection 292-25(3) of the ITAA 1997 if:

the amount is allocated from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities (contingent or not), as soon as they become due, in respect of superannuation income stream benefits that are payable by the fund at that time; …

On the facts of this case, this exception cannot apply as the pension ceased in the 2011-12 income year. The amount in question is not being used to discharge any income stream benefits.

The Explanatory Statement to the Income Tax Assessment Amendment Regulations 2007 (No. 3) which introduced the above exception states:

The second condition applies to allocations from a reserve used solely for the purpose of discharging superannuation income stream liabilities that are currently payable. For example, a fund is paying a lifetime income stream to a member and maintains a reserve to meet the payments in case the person lives longer than expected.

An amount allocated from such a reserve will not be included as a concessional contribution if it is used to pay an income stream liability during a financial year.

Thus, the legislative intent behind the exception in paragraph 292-25.01(4)(b) of the ITAR 1997 appears to be that the allocation is made from a reserve whose sole purpose is to ensure that the fund can pay out an eligible pension (either on its own or in conjunction with another account). This is not what is happening in the current case.

Another exception that needs to be considered is paragraph 292-25.01(4)(a) of the ITAR 1997. This provision excludes, from the definition of a 'concessional contribution', an allocation from a reserve where:

(i) the amount is allocated, in a fair and reasonable manner:

(A) to an account for every member of the complying superannuation plan; or

(B) if the member is a member of a class of members of the complying superannuation plan, and the amount in the reserve relates only to that class of members - to an account for every member of the class; and

(ii) the amount that is allocated for the financial year is less than 5% of the value of the member's interest in the complying superannuation plan at the time of allocation; …

As the amount is currently sitting in a reserve account, we are unable to confirm that this exception is applicable. The amount in question does not have to be allocated in one transaction. The trustees of the Fund may allocate the amount in any manner that the trust deed allows.

However, if the transaction does not meet one of the exceptions listed in subregulation 292-25.01(4) of the ITAR 1997, the amount will form part of the relevant member's concessional contributions for that year. If the amount exceeds the concessional contributions cap in the year it is allocated (currently $25,000), then the member will be liable for the resulting excess contributions tax.

Conclusion

If the trustee of the Fund allocates an amount, from the money previously set aside to provide a pension under subregulation 1.06(7) of the SISR, to a member of the Fund, then:

(a) it will form part of that member's concessional contributions for the purposes of excess contributions tax in the year it is allocated; and

(b) that member may be liable for excess contributions tax.

Please note that if the full amount is allocated in one financial year, this is significantly in excess of the concessional contributions cap (currently $25,000). Therefore, the excess would also count towards that member's non-concessional contributions cap.