Edited version of your private ruling

Authorisation Number: 1012479515187

Ruling

Subject: Elements taxed and untaxed in the fund

Issue 1

Trustee's choice to exclude certain contributions from assessable income of a public sector superannuation scheme

Questions

1. In accordance with section 295-180 of the Income Tax Assessment Act 1997 (ITAA 1997), can the Board of the Scheme (the Trustee) exclude from the assessable income of the Scheme amounts covered by notices given by the Trustee under section 307-285 of the ITAA 1997 in respect of contributions to provide superannuation lump sum benefits and income stream benefits?

2. In accordance with section 295-180 of the ITAA 1997, can the Trustee exclude from the assessable income of EISS amounts covered by notices given by the Trustee under section 307-285 of the ITAA 1997 in respect of contributions to provide superannuation income stream benefits?

Answers

1. Yes.

2. Yes.

Issue 2

Conversion of 'element taxed in the fund' to 'element untaxed in the fund'

Question

Can the Trustee make a choice under section 307-285 of the ITAA 1997 to treat the taxable component of a superannuation benefit paid from the scheme as an element untaxed in the fund?

Answer

Yes

This ruling applies for the following period

1 July 2012 to 30 June 2015

The scheme commenced on

During the period 1 July 2012 to 30 June 2015

Relevant facts

The Scheme was established under a law of a State. Under the relevant legislation the assets of the Scheme are vested in the trustee of the Scheme.

The Scheme came into operation before 6 September 2006.

Employer contributions and investment earnings within the Scheme are subject to tax. On receipt, member benefits are taxed at the rates applicable to a taxed superannuation fund.

The Scheme complies with Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994, as far as practicable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-160.

Income Tax Assessment Act 1997 Section 295-180.

Income Tax Assessment Act 1997 Subsection 295-180(1).

Income Tax Assessment Act 1997 Subsection 295-180(2).

Income Tax Assessment Act 1997 Subsection 295-180(3).

Income Tax Assessment Act 1997 Subsection 295-180(5).

Income Tax Assessment Act 1997 Section 307-5.

Income Tax Assessment Act 1997 Section 307-285.

Income Tax Assessment Act 1997 Subsection 307-285(1).

Income Tax Assessment Act 1997 Subsection 307-285(2).

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

Superannuation Industry (Supervision) Act 1993 Section 10.

Taxation Administration Act 1953 Section 16-155 of Schedule 1.

Taxation Administration Act 1953 Section 16-165 of Schedule 1.

Act Interpretation Act 1901 Section 15AB.

Further issues for you to consider

None

Does Part IVA apply to this ruling?

The ruling is limited to the questions raised in the application.

Reasons for decision

Issue 1

Summary

The reference to 'contributions to provide superannuation benefits' in the legislation is a reference to contributions to provide lump sum benefits and superannuation income stream benefits.

Therefore, the Trustee may choose to exclude from the assessable income of the Scheme amounts covered by notices given by the Trustee in respect of employer contributions to provide superannuation lump sum benefits or superannuation income stream benefits.

Detailed reasoning

Choice to exclude certain contributions from assessable income

Subsection 295-180(1) of the ITAA 1997 allows the trustee of a public sector superannuation scheme to exclude from the assessable income of the scheme for an income year contributions covered by Item 1 of the table in section 295-160, to the extent that the trustee chooses that they be excluded.

Relevantly, Item 1 of the table in section 295-160 of the ITAA 1997 refers to contributions to superannuation funds (whether complying or non-complying) to provide superannuation benefits for someone else (other than a contribution that is a roll-over superannuation benefit).

A superannuation fund is defined in section 10 of the Superannuation Industry (Supervision) Act 1993 (the SISA)¹ as:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

A public sector superannuation scheme is also defined in section 10 of the SISA as a scheme which is established:

(a) by or under a law of the Commonwealth or of a State or Territory; or

(b) under the authority of:

(i) the Commonwealth or the government of a State or Territory; or

(ii) a municipal corporation, another local governing body or a public authority constituted by or under a law of the Commonwealth or of a State or Territory

A superannuation benefit is defined in section 307-5 of the ITAA 1997² provides that superannuation benefit means a payment to a person from a superannuation fund because the person is a fund member. It follows that the reference to 'contributions to provide superannuation benefits' in Item 1 of the table in section 295-160 is a reference to contributions to provide lump sum benefits and superannuation income stream benefits.

The Scheme was established under a law of a State. As such, it is a 'public sector superannuation scheme' for the purposes of section 295-180 of the ITAA 1997 and a 'superannuation fund' for the purposes of section 307-5. This is notwithstanding the fact that it would appear that currently all the members of the Scheme are employees of private sector employers.

However, the choice under section 295-180 of the ITAA 1997 can be made by a trustee only if:

(a) the entity that made the contribution consents to the choice³;

(b) the choice is in relation to a public sector superannuation scheme that came into operation before 6 September 2006⁴; and

(c) amount in relation to the choice does not exceed the sum of amounts covered by notices given by the trustee under section 307-285 of the ITAA 1997 for superannuation benefits paid in the income year⁵.

In this case:

· the Scheme came into operation before 6 September 2006;

· the entities that made contributions, that is, the employers, consent to the Trustee's choice; and

· the amount in relation to the choice is the amount covered by notices given by the Trustee in accordance under section 307-285 of the ITAA 1997.

Therefore, contributions to provide both superannuation lump sum and/or income stream benefits may be excluded from the assessable income of the Scheme to the extent that the Trustee chooses to do so.

Making the choice to exclude contributions from the assessable income of the Scheme effectively shifts liability to pay the tax on these contributions to the recipient of the lump sum and/or the income stream benefit when it is paid out by the Scheme. The lump sum and/or income stream benefit is treated as an element untaxed in the fund (rather than an element taxed in the fund) and taxed as such.⁶

Alternative view

Section 307-125 was amended by the Tax Laws Amendment (Simplified Superannuation) Act 2007. The accompanying Explanatory Memorandum (EM), at paragraph 2.116, states:

Some superannuation funds finance their benefits by making large one-off contributions. The trustee of the fund, with the consent of the contributor, can then elect for these contributions not to be taxable. Some funds also allow their members to elect whether the taxable component of their benefit is paid as an element taxed in the fund or an element untaxed in the fund. These arrangements will continue but will not be available for plans established after 5 September 2006. [Schedule 1, item 1, section 307-285]

Based on the above, it may be argued, that the choice under section 307-285 of the ITAA 1997 is only available in circumstances outlined in the EM, namely in case of 'large one-off contributions'.

However, our preferred view is that section 307-285 of the ITAA 1997 has a general application and is not restricted to only 'large one-off contributions as suggested by the EM.

This view is based on the fact that section 15AB of the Acts Interpretation Act 1901 provides that material extrinsic to an Act (for example, the EM) can only be used to:

(a) confirm that the ordinary meaning of a provision is appropriate;

(b) resolve the meaning of ambiguous or obscure provisions; or

(c) determine the meaning of a provision where the ordinary meaning is manifestly absurd or unreasonable.

In the present case, the wording of section 307-285 of the ITAA 1997 is clear and unambiguous. The ordinary meaning of the provision is neither manifestly absurd or unreasonable and the EM does not confirm that the ordinary meaning is appropriate. Therefore the EM cannot be relied on to determine the meaning of the provision.

Further, even if the EM may be referred to, it cannot be relied on to alter the interpretation that the court, without reference to the EM, would place on that provision.⁷ In regard to restricting the application of a provision expressed in general terms, in Telstra Corporation Ltd v Australian Competition and Consumer Commission⁸ it has been held:

Those responsible for drafting legislation should not use explanatory memoranda to suggest the existence of some unexpressed restriction in the unambiguous terms of the bill before the Parliament. Such legislative drafting or elision is to be deprecated. It fundamentally undermines the right of persons to know what their freedoms and obligations are as provided by the law in the words enacted by the Parliament. It is one thing to read the (clear) words and text of an Act of the Parliament, but it is another thing to require people to look beyond these to the raft of secondary materials to which s 15AB of the Acts Interpretation Act 1901 (Cth) and its analogues suggest the Court may have resort, for the purposes of divining the intention of Parliament.

Therefore, the EM cannot be used to limit the scope of section 307-285 of the ITAA 1997 to only large one-off contributions.

Issue 2

Summary

The Scheme meets all the conditions set out in the legislation. Therefore the Trustee can treat the taxable component of a superannuation benefit paid from the Scheme as an element untaxed in the fund.

Detailed reasoning

Conversion of element taxed in the fund to element untaxed in the fund

In accordance with subsection 307-275(1) of the ITAA 1997,the taxable component of a superannuation benefit consists of an element taxed in the fund or an element untaxed in the fund, or both.

Subsection 307-275(2) of the ITAA 1997, which forms part of Subdivision 307-E, states that the taxable component of a superannuation benefit consists entirely of an element taxed in the fund except as provided in a later section of Subdivision 307-E.

Section 307-285 of the ITAA 1997 provides that the taxable component of a superannuation benefit received from a public sector superannuation scheme consists of an element untaxed in the fund if:

(a) the scheme came into operation before 6 September 2006; and

(b) the trustee of the scheme gives the recipient a written notice specifying an amount of the element untaxed in the fund of the taxable component of the benefit; and

(c) the notice is given within the time and in the manner approved by the Commissioner in writing.

In this case, the Scheme meets all the conditions set out in subsection 307-285(1) of the ITAA 1997. Therefore, the Trustee may convert an element taxed in the fund to an element untaxed in the fund.

However, in relation to notices in paragraph (b) above, the trustee of the scheme can give only one notice in relation to a particular superannuation benefit⁹.

Manner and timing of notices

Subsection 307-285(1) of the ITAA 1997 is a re-write of former subsection 27AB(4) of the Income Tax Assessment Act 1936 (ITAA 1936) which states:

… where:

(a) an ETP is paid from a taxed superannuation fund;

(b) apart from this subsection, the post-June 83 component of the ETP consists wholly or partly of a taxed element (which taxed element is in this subsection called the "otherwise taxed element"); and

(c) the trustee of the fund gives to the person to whom the ETP is paid, within the time and in the manner approved by the Commissioner in writing, a written notice nominating the whole or a specified part of the otherwise taxed element as an untaxed element of the post-June 83 component of the ETP;

so much of the otherwise taxed element of the post-June 83 component of the ETP as is covered by the notice shall be treated as, or as an additional part of, the untaxed element of the post-June 83 component of the ETP

The timing and manner in which the notices are to be given are not specified in either the ITAA 1997 or ITAA 1936.

However, Income Tax Ruling IT 2573 sets out the information to be provided in various notices and certificates if they are to be accepted as being in an approved form. At paragraph 14, it states:

Under subsection 27AB(4), the trustee of a superannuation fund is required to notify an eligible termination payment (ETP) recipient in writing of the amount of the relevant untaxed element of the ETP for the purposes of that subsection. The standard Statements of Termination Payment provided by the Taxation Office have been altered to allow the trustee of a superannuation fund to show the amount of untaxed element for the purposes of subsection 27AB(4). The approved method for giving a subsection 27AB(4) notice is completion of the appropriate block on the Statement of Termination Payment for the particular ETP.

Currently, when a superannuation entity pays a superannuation lump sum or a superannuation income stream benefit they are required to complete a PAYG payment summary - superannuation lump sum and a PAYG payment summary - superannuation income stream respectively. The appropriate method for giving a notice in accordance with subsection 307-285(1) of the ITAA 1997 is completing the appropriate block (that is, untaxed element of the taxable component of benefit) on the relevant payment summary.

In accordance with section 16-165(1) of Schedule 1 of the Taxation Administration Act 1953 (TAA), where an entity makes a superannuation lump sum payment, they must give a PAYG payment summary - superannuation lump sum to the recipient that covers the payment (and no other payments) within 14 days of the payment. They must also give a copy of the summary to the Commissioner.

With regard to PAYG payment summary - superannuation income stream - the payer is required to give a summary to the Commissioner (and a copy of the summary to the recipient) within 14 days after the end of a financial year (section 16-155 of Schedule 1 of the TAA).

¹ Subsection 995-1(1) of the ITAA 1997

² Subsection 995-1(1) of the ITAA 1997

³ Subsection 295-180(2) of the ITAA 1997

⁴ Subsection 295-180(5) of the ITAA 1997

⁵ Subsection 295-180(3) of the ITAA 1997

⁶ Subsection 295-180(2) of the ITAA 1997

⁷ DC Pearce & RS Geddes 2001, Statutory Interpretation, 5^th ed, Butterworths, Sydney p 61.

⁸ [2008] FCA 1758; (2008) 107 ALD 474; [2008] ATPR 42-259; (2008) 176 FCR 153; [2010] ALMD 6094

⁹ Subsection 307-285(2) of the ITAA 1997.