Edited version of your written advice

Authorisation Number: 1012964634013

Date of advice: 15 February 2016

Ruling

Subject: Superannuation income streams - untaxed element

Questions

1. Is the CPI-indexed pension the taxpayer receives from the Commonwealth Superannuation Scheme (CSS) comprised wholly of an element untaxed in the fund?

2. Is the element untaxed in the fund of the pension the taxpayer receives from the CSS assessable income?

Answers

1. Yes

2. Yes

This ruling applies for the following period:

Income year ended 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The taxpayer ceased employment with the public service before 1988.

Rather than withdrawing their benefits from the CSS, the taxpayer elected to leave their benefits preserved in the CSS for payment at a later date, thus creating a deferred benefit entitlement.

The taxpayer claimed a CPI-indexed pension and a non-indexed pension from their deferred benefit during the 20XX-YY income year.

Prior to claiming their pensions, the taxpayer's deferred benefit consisted of the following two components:

n Member Component - this represents the taxpayer's basic contributions payable at 5% of the taxpayer's salary, any additional supplementary contributions, and the interest on these contributions; and

n Employer Component - this is a notional component that is determined by a formula when the benefit is claimed. Until the benefit is claimed, this component is notional and does not exist.

The taxpayer's entire member component was converted to the non-indexed pension while the taxpayer's entire employer component was converted to the CPI-indexed pension.

The CPI-indexed pension was calculated by multiplying the taxpayer's basic member contributions and fund earnings by 2.5 and then by an age conversion factor.

The CPI-indexed pension is paid from consolidated government revenue.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 301-C

Income Tax Assessment Act 1997 Section 301-100

Income Tax Assessment Act 1997 Section 307-295

Reasons for decision

Summary

The CPI-indexed pension the taxpayer receives from the CSS is comprised wholly of an element untaxed in the fund as it is not sourced to any extent from contributions made into the fund or earnings on such contributions.

The CPI-indexed pension the taxpayer receives from the CSS must be included in the taxpayer's assessable income in accordance with section 301-100 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Element untaxed in the fund

The CSS is a scheme for the payment of superannuation benefits established under the Superannuation Act 1976. As such, it satisfies the definition of a "public sector superannuation scheme" under the ITAA 1997.

According to section 307-295 of the ITAA 1997:

(1) This section applies to a superannuation benefit that is paid from a public sector superannuation scheme that is not a constitutionally protected fund.

(2) If the superannuation benefit is not sourced to any extent from contributions made into a superannuation fund or earnings on such contributions, the taxable component of the superannuation benefit consists wholly of an element untaxed in the fund.

In the taxpayer's case, their CPI-indexed pension is sourced entirely from consolidated revenue. As such, the CPI-indexed pension is comprised wholly of an element untaxed in the fund.

While it is acknowledged that the calculation of the CPI-indexed pension is based off an after-tax amount, this does not mean that the actual source of the pension is from an after-tax source. The annual rate of the taxpayer's pension must be calculated in accordance with the formula outlined in the Superannuation Act 1976, which happens to use a person's accumulated basic contributions. This does not change the fact that the taxpayer's CPI-indexed pension is ultimately paid from consolidated revenue.

Taxation of the element untaxed in the fund

There are different taxation treatments for an element taxed in the fund and for an element untaxed in the fund. There are also different tax concessions available for an element taxed in the fund and for an element untaxed in the fund.

The taxation of the untaxed element of the taxable component is outlined in Subdivision 301-C of the ITAA 1997. Specifically, section 301-100 of the ITAA 1997 states that:

(1) If you are 60 years or over when you receive a superannuation income stream benefit, the element untaxed in the fund of the benefit is assessable income.

(2) You are entitled to a tax offset equal to 10% of the element untaxed in the fund of the benefit.

It is acknowledged that a taxpayer over 60 years of age receiving a superannuation income stream benefit from a taxed scheme would be exempt from paying tax on their pension. However, this does not mean that the taxpayer's pension in the current case should also be tax free as there are a number of important differences between taxed schemes and untaxed schemes (For example, there is only a notional employer component in the taxpayer's situation. If the taxpayer had belonged to a taxed scheme, there would be actual employer contributions and the earnings on these contributions would be taxed at 15%). The lawmakers have considered that the 10% rebate is the appropriate concession to apply to untaxed schemes in light of these differences.

The role of the ATO is to apply the legislation which, in section 301-100 of the ITAA 1997, is very specific and clearly states the circumstances where the element untaxed in the fund must be included in a person's assessable income.

Furthermore, there is no discretion under Subdivision 301-C of the ITAA 1997 or anywhere else in the tax legislation that would allow the Commissioner to deem an untaxed element to be a taxed element or to alter the rate of tax. As the taxpayer was over 60 years of age when they received their superannuation income stream benefit, the untaxed element must be included in their assessable income and they are entitled to a tax offset equal to 10% of the element untaxed in the fund of the benefit.