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Edited version of your written advice
Authorisation Number: 1012789913111
Advice
Subject: Concessional contributions
Facts
1. APRA requires Registrable Superannuation Entities (RSEs) to have an effective risk management framework and maintain adequate financial resources to address operational risk events, including an Operational Risk Financial Requirement (ORFR) target amount of at least 0.25% of Funds under Management (FUM).
2. FUM is considered to be the total of asset balance of each RSE within the RSE licensee's business operations.
3. In the case of this fund, each member has a separate, linked ORR account.
4. Upon entry into the fund and at each quarter, the ORR member account is adjusted.
5. Amounts are moved from the member's account to the member's ORR account where the member's FUM increases so it meets the fund's ORFR.
6. Amounts are moved back to the member's account from the member's ORR where the FUM decreases.
7. Amounts in the ORR account may be used to provide restitution in whole or in part in the event of an operational risk event.
8. Members have no access to the ORR account, have no rights over the amounts held and the amount in the ORR account is not included in the member balance for fee calculation purposes.
9. On exit, the full balance of the ORR account linked to the member account is transferred back to the member account and paid out to the member.
10. Upon partial withdrawal or when the balance of the member account falls due to market conditions, the ORR requirement is reduced and so amounts will be transferred from ORR back to member account or paid out with the withdrawal amounts.
Reasons for decision
Summary
1. From the facts of the case, the concessional contribution cap would not be triggered as long as the amount towards concessional contributions cap is already taken into account upon initial allocation to the member account before it is moved to the ORR so that double counting does not occur.
Detailed reasoning
2. The purpose of section 292-25 of the ITAA 1997 is to make sure that allocations for a member in accordance with conditions specified in the regulations is a concessional contribution for a financial year.
3. A contribution is counted as a concessional contribution if it is an amount under subsection 291-25(2) of the ITAA 1997 and under subsection 291-25(3) of the ITAA 1997.
4. In particular, amounts allocated from a reserve is counted as concessional contribution unless the exception under subregulation 292-25.01(4) applies.
5. The subregulation states that an amount allocated from the reserve is counted unless the amount is allocated in a fair and reasonable manner to an account for every member of the complying superannuation plan or 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 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.
6. In this case, where each member has an individual ORR account linked to their member account, the amounts in and out of the member's ORR into the member account would not impact on the concessional contributions cap.
7. The concessional contribution cap would not be triggered as long as the amount towards concessional contributions cap is already taken into account upon initial allocation to the member account before it is moved to the ORR so that double counting does not occur.
8. In this case, the amounts in the ORR have come from the members account and have 'already been subjected to tax' before it is used for restitution, rebalancing or repaid on exit. Therefore, any payments back to the member from the ORR are a form of restitution rather a 'fresh' contribution or an allocation from a reserve.
9. Furthermore, subregulation 292-25.01(4) of the ITAR 1997 would adequately cover the transfer of funds from the member's ORR account into the member's account as this process applies to all members of the fund and would satisfy sub-subregulation 292-25.01(4)(a)(i)(A).
10. Subsection 115(2) of the Superannuation Industry (Supervision) Act 1993 also states that the governing rules of a registrable superannuation entity must not prohibit the maintenance of a reserve to cover the operational risk relating to the entity.