Edited version of your written advice

Authorisation Number: 1012919951872

Date of advice: 1 December 2015

Ruling

Subject: Concessional contributions

Question

Will the commutation of a lifetime pension and the commencement of more than one, but most likely two, market linked pensions be treated as a concessional contribution as defined in section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following periods:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015.

Relevant facts and circumstances

A person (Your Client) is a member of a complying self-managed superannuation fund (the Fund).

The Fund pays a complying lifetime pension (the Lifetime Pension) and an account based pension to Your Client.

The Lifetime Pension commenced in July 1991 and is provided under the rules that meet the standards of subregulation 1.06(2) of the SISR.

Your Client intends to commute their Lifetime Pension. The commutation value of the Lifetime Pension will then be applied to commence more than one, but most likely two, separate marked linked pensions.

You have stated that actuarial advice will be obtained to calculate the commutation value of the Lifetime Pension.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 291

Income Tax Assessment Act 1997 Section 291-25

Income Tax Assessment Act 1997 Subdivision 295-C

Income Tax Assessment Regulations 1997 Regulation 292-25.01

Superannuation Industry (Supervision) Act 1993

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(2)

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(8)

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.17C

Superannuation Industry (Supervision) Regulations Division 7.2

Taxation Administration Act 1953 Subsection 359-5(1)

Taxation Administration Act 1953 Section 357-55

Reasons for decision

If Your Client commutes their Lifetime Pension and then uses the resulting commutation lump sum to purchase a number of market linked pensions that meet the requirements of subregulation 1.06(8) of the SISR, the commutation lump sum will not be treated as a concessional contribution for the purposes of section 291-25 of ITAA 1997 to the extent that it does not exceed the commutation value of the pension on the day it is commuted.

Detailed reasoning

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 an amount in a member's concessional contributions where an amount in a complying superannuation plan is allocated by the superannuation provider in relation to the plan for the member in accordance with the conditions specified in the regulations. The relevant regulation in relation to subsection 291-25(3) of the ITAA 1997 is regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

Provisions in the Act that inserted Division 291 into the ITAA 1997 operate to ensure that the regulations applying to concessional contributions in Division 292 of the ITAA 1997 continue to apply to Division 291. Consequently, regulation 292-25.01 of the ITAR 1997 sets out these conditions.

Subregulation 292-25.01(2) of the ITAR 1997 includes an amount in a member's concessional contributions for a financial year where the amount is allocated by the trustee under Division 7.2 of the SISR and the amount allocated is an assessable contribution under Subdivision 295-C of the ITAA 1997. Subregulation 292-25.01(2) does not apply to the current case as a lump sum that results from the commutation of a pension is not a contribution that is required to be allocated under Division 7.2 of the SISR.

In this case, a pension which meets the standards of regulation 1.06(2) of the SISR is to be commuted and the lump sum resulting from the commutation is to be used to purchase a number of benefits provided under the rules that meet the standards of subregulation 1.06(8) of the SISR (market linked pensions).

In ATO Interpretative Decision ATO ID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension (ATOID 2015/22), the Commissioner considered, in part, whether the amount standing to the credit of a 'pension account' maintained in relation to the complying lifetime pension as the superannuation lump sum (resulting from the commutation of that pension) that is transferred to commence a 'market linked pension' payable to the member would be a concessional contribution of the member.

The Commissioner's view, as stated in ATO ID 2015/22, is that a complying lifetime pension account represents a reserve for the purposes of regulation 292-25.01 of the ITAR 1997 because it is an amount that is available to the trustee of the fund, not the member, to satisfy the trustee's liability to pay the complying lifetime pension. Therefore, it is subregulation 292-25.01(4) of the ITAR 1997, which applies to allocations from a reserve, that should be considered in the current case.

Relevantly, under paragraph 292-25.01(4)(b) of the ITAR 1997, an amount allocated from a reserve (other than an amount covered by subregulation 292-25.01(2) of the ITAR 1997) is a concessional contribution unless:

i) 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) …

(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) …

Applying the paragraph 292-25.01(4)(b) exception

With respect to Your Client, if their Lifetime Pension is commuted; and the resulting commutation lump sum is then allocated to Your Client to commence one or more market linked pensions that meet the requirements of subregulation 1.06(8) of the SISR, then it is the Commissioners view that the requirements in paragraph 292-25.01(4)(b) of the ITAR 1997 would be satisfied and the allocation would not be a concessional contribution for the purposes of section 291-25 of the ITAA 1997.

However, it should be noted that subregulation 1.06(6) of the SISR provides that where, under the rules, a pension can be commuted, the conversion to a lump sum is limited to an amount that is not greater than the sum determined by applying the appropriate pension valuation factor under Schedule 1B of the SISR to the pension as if the commencement day were the day on which the commutation occurs.

Therefore, if on the commutation of the Lifetime Pension, the resulting lump sum that is allocated to Your Client to purchase market linked pensions is less or equal to the commutation value of the Lifetime Pension, the amount will not be treated as concessional contributions for the purposes of section 291-25 of the ITAA 1997. However, if the amount allocated is greater than the commutation value of the Lifetime Pension, the amount in excess will be treated as a concessional contribution for the purposes of section 291-25 of the ITAA 1997.