Edited version of administratively binding advice

Authorisation Number: 1012535962019

Advice

Subject: Concessional contributions - allocation from a reserve

Question

Where a member commutes a complying market linked pension (CMLP) payable to them, will the member have concessional contributions for a financial year if the trustee of the fund both:

· uses the amount standing to the credit of the 'pension account' maintained in relation to the CMLP resulting from the commutation of that pension, and

· allocates the amount standing to the credit of a 'pension reserve',

to commence a new market linked pension for the member?

Answer

Yes.

This administratively binding advice applies for the following period

Year ending 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

The superannuation fund (the Fund) is a self managed superannuation fund (SMSF).

The Fund has a corporate trustee (the Trustee).

The directors of the corporate trustee are also members of the Fund (Member 1 and Member 2), who are the only members of the Fund.

Member 1 is currently aged over 60 and commenced a complying lifetime pension (CLP) at age 55, in accordance with subregulation 1.06(2) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

The CLP had a 3% guaranteed pension increase on 1 July of each year, and was 100% reversionary on death to Member 2 (the member's spouse).

A Copy of Resolutions made by the directors of the corporate trustee prior to the commencement of the CLP stated the review of accrued benefits for Member 1 showed a specific amount would be required to support a lifetime complying pension and resolved that the amounts shown in the member's total account balance confirm there are sufficient unrestricted non-preserved benefits from which to pay out that lifetime complying pension to Member 1.

Member 2 is currently aged over 60.

As a result of superannuation legislative changes from 1 July 2007 and other reasons including for estate planning purposes, Member 1 and the Fund sought advice as to any possible restructure of the CLP.

A copy of a report obtained from an actuary dated in the 200X income year (Actuarial report) has been provided.

The Actuarial report advised that the CLP could be rolled over to another pension provided that the pension was a market linked pension as per subregulation 1.06(8) of the SISR.

The amount that the actuary certified could be rolled over to the market linked pension ranged between the 'Best Estimate Calc (ATO) Basis' and the 'High Probability Value'.

These calculations were based upon the Fund's latest set of financial statements available at the time of the report, being the 200Y financial statements.

Figures from the Actuarial report showed the total amount of assets backing the CLP exceeded both actuarially calculated rollover values as at 1 July 2007.

The rollover from the CLP to a market linked pension (the current MLP) was effected on 1 July 2007.

The amount used to roll over from the CLP to the current MLP was the maximum amount recommended to be rolled over as advised in the Actuarial report.

The difference between the amount rolled over and the amount backing the CLP was effectively left in the Fund's pension reserve account (the 'Pension Reserve').

The Actuarial report showed the values for the following, in respect of Member 1 as at 1 July 200X:

· Allocated Pension

· Market Linked Pension

· Backing Defined Pension

· The current annual defined benefit pension amount

· Total Assets Backing Defined Pension

The summary provided from the Actuarial report was that Member 1 'could roll over on 1 July 200X an amount [partly] backing the defined pension (and so would need to consider how to utilise the... (free reserves); …'

The Fund stated the 'Pension Reserve' has been solely used to support pensions.

Both members have 100% of their respective entitlement in pension accounts within the Fund.

Copies of the Fund's financial statements and the member statements in respect of the two members' pension accounts have been provided.

Figures from the Statements of Financial Position as at 30 June 20XX show:

· the balance of the 'Pension Reserve'

· the balance of the members' pension accounts

Figures from the Fund's member statements as at 30 June 20XX for the two members show total funds of amounts allocated to the member accounts as follows:

· Member 1 (account 1)

· Member 1 (account 2)

· Member 2

The two members of the Fund have one adult child who is the sole beneficiary of their Estate.

Upon their respective deaths, they wish that their superannuation benefits remaining at death be passed entirely to their adult child.

Member 1 wishes to fully commute their current MLP for the purpose of commencing a new market linked pension (the new MLP) using the MLP commutation amount together with the balance in the 'Pension Reserve' to commence the new MLP.

Copies of relevant documents provided include:

· a copy of the Fund trust deed which applied at the time of commencement of the CLP

· a copy of Resolutions of Trustee directors in relation to the commencement of the CLP

· a copy of the Fund trust deed (Deed variation) which applied at the time of the commutation of the CLP to the current MLP.

A Rule of the Trust Deed allows the Fund to establish a reserve but does not prescribe when and in what circumstances such a reserve can be utilised.

Another Rule of the Trust Deed provides the rules for the payment of pensions by the Fund but does not make any provision as to reserves.

Clarification was sought from the Trustee as to how the CLP restructure was effected on 1 July 2007 when the Actuarial report was dated some 12 months later.

The response received was that:

· after discussions between the member and the Fund's accountant prior to 1 July 200X, the member requested that their CLP cease and be converted to a MLP as from 1 July 200X;

· this conversion would require the Fund's 200X financial statements to be prepared and a report provided by an actuary as to the amount to use to commence the MLP as of 1 July 200X;

· by the time that the 200X financial statements were prepared and the actuarial report for the conversion was obtained, some 12 months had passed from the original request of the member for the conversion and the decision of the Trustee to effect the conversion;

· once the actuarial report was obtained, it was decided that the conversion would take effect as of 1 July 200X.

Summary of conclusions from the Actuarial report stated the conversion should be documented with the usual member request letter and minutes after checking the deed.

The letter from the representative of the Trustee stated:

· the Trustee has been unable to locate documents in relation to the commutation of the CLP and commencement of the current MLP.

· there is no written request from the member or Trustee resolutions in relation to the proposed commutation of the current MLP to commence a new MLP.

Relevant legislative provisions

Taxation Administration Act 1953 Division 359

Income Tax Assessment Act 1997 Subsection 291-25(1)

Income Tax Assessment Act 1997 Subsection 291-25(2)

Income Tax Assessment Act 1997 Subsection 291-25(3)

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

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

Income Tax Assessment Regulations 1997 Subparagraph 292-25.01(b)(b)(ii)

Income Tax Assessment Regulations 1997 Sub-subparagraph 292-25.01(4)(b)(ii)(B)

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Superannuation Industry (Supervision) Regulations1994 Subregulation 1.06(2)

Superannuation Industry (Supervision) Regulations1994 Subregulation 1.06(8)

Reasons for decision

Summary

If the member's current complying market linked pension is commuted to begin a new market linked pension, any accompanying allocation from the reserve to the member will be counted as a concessional contribution within the meaning of subsection 291-25(3) of the Income Tax Assessment Act 1997.

Detailed reasoning

The legislative provisions concerning excess concessional contributions tax (ECT) were formerly contained in Subdivision 292-B of the Income Tax Assessment Act 1997 (ITAA 1997) and the ECT was formerly imposed under the Superannuation (Excess Concessional Contributions Tax) Act 2007 (ECCTA). Both Subdivision 292-B of the ITAA 1997 and the ECCTA are now repealed, effective from 29 June 2013).

From 1 July 2013, the Superannuation (Excess Concessional Contributions Charge) Act 2013 imposes a charge on a person's excess concessional contributions in a financial year. The legislative provisions for concessional contributions are now contained in new Division 291 of the ITAA 1997.

Administratively binding advice

In your application, you asked for a private ruling concerning concessional contributions and excess concessional contributions tax.

Division 359 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that a private ruling is a written statement of the Commissioner's opinion of how a relevant provision applies, or would apply, to a particular entity in relation to a specified scheme.

Section 359-5 of Schedule 1 to the TAA provides that the Commissioner may, on application, make a written ruling on the way in which a relevant provision applies, or would apply, to an entity in relation to a specified scheme.

A provision of an Act or regulation of which the Commissioner has the general power of administration is relevant for ruling only if it is about any of the matters set out in section 357-55 of Schedule 1 to the TAA.

None of the paragraphs in section 357-55 of Schedule 1 to the TAA allow a private ruling to be given in relation to excess contributions tax. Paragraph 357-55(a) of Schedule 1 to the TAA allows a ruling to be given on 'tax'. However, according to section 995-1 of the ITAA 1997 'tax' means:

(a) income tax imposed by the Income Tax Act 1986 as assessed under this Act; or

(b) income tax imposed as such by any other Act, as assessed under this Act.

Division 291 of the ITAA 1997 concerning excess concessional contributions does not apply to the Trustee but to the individual members of the Fund as the law change provides for excess concessional contributions to be included in an individual's assessable income and subject to a charge. The Commissioner does not have the ability to make a written ruling under Division 359 of the TAA to the Trustee concerning the charge on excess concessional contributions.

In the interests of sound administration, the ATO's practice has been to provide administratively binding advice in a limited range of circumstances in response to a taxpayer's request for advice.

One such circumstance is advice on superannuation, excise or any other law administered by the Commissioner under which the extent of liability is worked out.

Accordingly, administratively binding advice is given in response to your application concerning concessional contributions and excess concessional contributions.

Please refer to Practice Statement Law Administration PS LA 2008/3 Provision of advice and guidance by the Australian Taxation Office (PS LA 2008/3) which provides an explanation on the giving of administratively binding advice by the Commissioner.

Paragraph 199 of PS LA 2008/3 states:

Administratively binding advice is not legally binding on the Commissioner. When the time comes to assess liability to tax, the law as it then exists must be applied to the facts as established at that time. However, the ATO will stand by what is said in such advice and will not depart from it unless:

· there have been legislative changes since the advice was given

· a tribunal or court decision has affected our interpretation of the law since the advice was given, or

· for other reasons, the advice is no longer considered appropriate. For example, if the advice has been exploited in an abusive and unintended way.

Concessional contributions

Subsection 291-25(1) of the ITAA 1997 provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 291-25(2) of the ITAA 1997 and each amount covered under subsection 291-25(3) of the ITAA 1997.

Subsection 291-25(3) of the ITAA 1997 includes in a person's concessional contributions for a financial year an amount in a complying superannuation plan that is allocated for the person for the year in accordance with the conditions specified in the regulations. The relevant regulation is regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

The law changes which inserted Division 291 to the ITAA 1997 included savings provisions in respect of regulations made under sections located in Division 292 of the ITAA 1997 that now have equivalent sections in new Division 291 applicable from the 2013-14 financial year onwards.

The effect of these saving provisions is that regulations made under Division 292 of the ITAA 1997 will continue to have effect as if they had been made under Division 291.

Regulation 292-25.01 of the ITAR 1997 therefore applies to subsection 291-25(3) of the ITAA 1997. This regulation set out conditions under which amounts allocated by a superannuation provider concerning a superannuation plan are concessional contributions.

Subregulation 292-25.01(4) provides that an amount allocated from a reserve is treated as being allocated in a way covered by subsection 292-25(3) of the ITAA 1997 unless an exclusion in subregulation 292-25.01(4) of the ITAR 1997 applies.

Paragraph 292-25.01(4)(a) of the ITAR 1997 excludes an amount that is allocated from a reserve if:

(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; or …

Paragraph 292-25.01(4)(b) of the ITAR 1997 excludes an amount that is allocated from a reserve if:

(iii) 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; and

(ii) any of the following applies:

(A) the amount has been allocated to satisfy a pension liability of the plan paid during the financial year;

(B) on the commutation of the income stream, except as a result of the death of the primary beneficiary, the amount is allocated to the recipient of the income stream, to commence another income stream, as soon as practicable;

(C) on the commutation of the income stream as a result of the death of the primary beneficiary, the amount:

(I) is allocated to a death benefits dependant to discharge liabilities in respect of a superannuation income stream benefit that is payable by the plan as a result of the death; or

(II) if sub-sub paragraph (I) does not apply - is paid as a superannuation lump sum and as a superannuation death benefit;

as soon as practicable.

Meaning of 'reserve'

There is no definition of 'reserve' in the ITAA 1997 or the ITAR 1997.

In ATOID 2012/32, the Commissioner concluded that 'reserve' as used in regulation 292-25.01 of the ITAR 1997 has a broad meaning and includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event.

The Commissioner's view is that '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.

Use of the reserve

If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of paragraph 292-25.01(4)(b) of the ITAR 1997, subparagraph 292-25.01(4)(b)(i) of the ITAR 1997 requires the reserve to be 'used solely for the purpose of enabling 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 object of Division 291 of the ITAA 1997 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.

The facts provided in respect of the member's complying lifetime pension

From the Actuarial report, the amount standing to the credit of the 'Pension Reserve' is based on calculations using the figures from the Fund's 200X financial statements.

Figures showed the total amount of the assets backing the complying lifetime pension (the CLP) as at 1 July 200X. The Fund has stated the commutation of the CLP to the current market linked pension (the MLP) was effected on 1 July 2007 using the amount of the 'High Probability Value' from the Actuarial Report.

The difference between the commutation amount and the amount backing the CLP was effectively left in the Fund's pension reserve account (the 'Pension Reserve').

Figures from the Actuarial report showed that amount.

Figures from the Statements of Financial Position as at 30 June 20XX show the balance of the 'Pension Reserve' as at 30 June 20XX.

Details from the Actuarial report also stated the CLP did not have a residual capital value.

From the Rules of the Fund (the Trust Deed) that applied at the time of the commutation of the CLP and commencement of the MLP in 200X, the Trustee is permitted by the relevant Fund Rules to establish such reserves and 'add, deduct and allocate amounts to those Reserves as it considers appropriate.' It is also stated that a member does not have any entitlement to amounts credited to a reserve.

Therefore the amounts held in the 'Pension Reserve' are not attributable to a specific member, rather it is money that the Fund has set aside to ensure that it can meet its specific financial obligations for the purpose for which the reserve was established.

Applying the law to the facts

Under subsection 291-25(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 291-25(3) of the ITAA 1997).

Pursuant to the savings provisions for Division 291 of the ITAA 1997, subregulation 292-25.01(4) of the ITAR 1997 provides that an amount allocated from a reserve is covered under subsection 291-25(3) of the ITAA 1997 unless one of the exceptions apply.

Unless specifically excluded, contributions made by or in respect of an individual are intended to be counted as a contribution.

Therefore it becomes necessary to consider whether any of the exceptions listed in subregulation 292-25.01(4) of the ITAR 1997 would apply to exclude an amount allocated from the 'Pension Reserve' to commence a new MLP from being counted towards the member's concessional contributions cap for the financial year.

The member wishes to commute the current market linked pension (the MLP) to commence a new market linked pension, which is permitted by paragraph 1.06(8)(d) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

This reserve originally supported the payment of a lifetime pension, the member's CLP (governed by subregulation 1.06(2)), which was commuted to commence a market linked pension (governed by subregulation 1.06(8)). However, the reserve supporting the lifetime pension was not allocated when this pension was commuted to commence the existing MLP.

In commuting that MLP to commence a new market linked pension, the Trustee wishes to allocate the amount left in the reserve, which they contend is supporting the payment of the existing MLP and therefore excepted from being captured as a concessional contribution under subsection 291-25(3) of the ITAA 1997 by virtue of paragraph 292-25.01(4)(b) of the ITAR 1997. ATOID 2012/84 provides relevant guidance on this point in the following terms:

If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of paragraph 292-25.01(4)(b) of the ITAR 1997, subparagraph 292-25.01(4)(b)(i) of the ITAR 1997 requires the reserve to be 'used solely for the purpose of enabling 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'.

Whether the reserve is to be 'used solely for the purpose of enabling 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' is primarily a question of fact which can only be ascertained by looking at the purpose and use of the reserve account (the 'Pension Reserve') in question.

On the basis of the information provided, there are no trustee resolutions or minutes pertaining to the commutation of the lifetime pension (the CLP) to commence a market linked pension (the MLP).

However, under the Fund trust deed (the Trust Deed) in force at this time:

· allows the Fund to establish a reserve but does not prescribe when and in what circumstances such a reserve can be utilised.

· provides the rules for the payment of pensions by the Fund but does not make any provision as to reserves.

Therefore the only evidence of the commutation of the lifetime pension to commence a market linked pension is contained in the Actuarial report.

From the final summary of conclusions in this report, the actuary states a dollar range that the member could roll over to a market linked pension from a lifetime pension.

The Trustee has advised that they adopted the actuary's recommendation to utilise the maximum amount when rolling over from the complying pension to the market linked pension. Earlier in the report, the actuary contemplates rolling over all monies backing the lifetime pension to a market linked pension (i.e. including those amounts in the reserve), but does not recommend that this approach be adopted owing to a lack of ATO view on the matter at the time. The strategy adopted by the Trustee did not utilise any amount of the reserve.

The report then discusses the various options for dealing with the 'freed' reserves amount. This includes allocating to the members in accordance with paragraph 292-25.01(4)(a) of the ITAR 1997, allocating parts of the reserve progressively each year up to the member's concessional contributions cap, or leaving the amount in the reserve. Importantly, the report does not consider, expressly or otherwise, the possibility that the reserve can be regarded as continuing to support the existing market linked pension.

It is reasonable to assert that the reference in the report to the 'freed' reserves amount and the discussion of the three options outlined above constitutes an acknowledgment on behalf of the actuary that the amount left in the reserve can no longer be considered to support the payment of a pension once the lifetime pension is commuted and the market linked pension has commenced in the manner in which the Fund did so.

Had the reserve been regarded as supporting the new pension (the MLP), the actuary would not have made recommendations to utilise what is described as the 'freed' reserves amount. The link between the reserve and the payment of a pension was severed once the lifetime pension was commuted.

Therefore, in this case, the reserve (the 'Pension Reserve') cannot be said to be used solely for the purpose of enabling the Fund to discharge all or part of its liabilities in respect of the existing market linked pension within the meaning of paragraph 292-25.01(4)(b) of the ITAR 1997.

Accordingly, if this pension (the existing MLP) is commuted to begin a new market linked pension, any concomitant (accompanying) allocation from the reserve (the 'Pension Reserve') to the member will be counted as a concessional contribution within the meaning of subsection 291-25(3) of the ITAA 1997.