Edited version of your written advice

Authorisation Number: 1013007786066

Date of advice: 5 May 2016

Ruling

Subject: Allocation from a reserve

Questions

1. If the trustee of a self-managed superannuation fund (the Fund) commutes a defined benefit complying pension payable to a member of the Fund, will the total commutation amount allocated to the payment of a 'market-linked pension' to the member be a concessional contribution of the member as defined in section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Where the market-linked pension is paid to the member's spouse on the death of the member as an automatic reversionary pension, is the pension tax free to the spouse in accordance with section 302-65 of the ITAA 1997?

Answers

1. No

2. Yes

This ruling applies for the following periods:

Income year ending 30 June 2016

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The trustee of the Fund (the Trustee) pays a defined benefit complying pension (the Pension) to a member of the Fund (the Member).

The Pension is a reversionary pension and reversionary beneficiary is the Member's spouse.

The Member has requested that the Trustee commute the Pension and apply the 'total of the commutation amount' to purchase a market-linked pension (MLP) in accordance with the applicable pension standards under the Superannuation Industry (Supervision) Regulations 1994 (SISR).

The 'total commutation amount' in respect of the Pension comprises of:

a) an amount standing to the credit of the pension account maintained in relation to the  Pension; and

b) the pension reserve amount in relation to the  Pension

The Pension has at all times complied with subregulation 1.06(2) of the SISR.

The governing rules of the Fund permit the Trustee to maintain a reserve and pay a pension to a member in accordance with the pension standards under the SISR.

The pension reserve has been used solely for the purposes of funding the payment of the 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 Act 1997 Section 302-65

Income Tax Assessment Act 1997 Section 307-5

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

Income Tax Assessment Regulations 1997 Regulation 292-25.01

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

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

Superannuation Industry (Supervision) Regulations Division 7.2

Reasons for decision

Summary

If the Trustee commutes the Pension payable to the Member and the total commutation amount (comprising the amount standing to the credit of the Pension and the pension reserve amount) is allocated to the payment of an MLP to the Member, the amount so allocated will not be a concessional contribution of the Member as defined in section 291-25 of the ITAA 1997.

An MLP paid by the Trustee to the Member's spouse on the death of the Member would be the spouse's not assessable and not exempt income in accordance with section 302-65 of the ITAA 1997. That is, it would be tax free.

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.

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 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 subregulation 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 superannuation income stream provided under the rules that meet the standards of subregulation 1.06(8) of the SISR (an MLP).

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 an MLP 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

For the purposes of regulation 292-25.01 of the ITAR 1997, if the Member's Pension is commuted, the total commutation amount comprising the amount standing to the credit of the pension account and the pension reserve amount together represent a reserve used solely for the purpose of enabling the Trustee to guarantee the pension payments for the term of the Pension.

Therefore, if on the commutation of the Pension, the total commutation amount (comprising the amount standing to the credit of the pension account and the pension reserve amount) is allocated to the Member for the payment of an MLP as soon as practicable, the amount so allocated would not be a concessional contribution as defined in section 291-25 of the ITAA 1997.

Taxation of superannuation death benefits

Subsection 995-1(1) of the ITAA 1997 states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

The table in subsection 307-5(1) of the ITAA 1997 lists the various types of superannuation benefits and describes a 'superannuation death benefit' as:

A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

In this case, as a result of the Member's death, a superannuation income stream (MLP) is to be paid by the Trustee to the Member's spouse because the Member was a member of the Fund. Therefore, an MLP paid to the Member's spouse would be a superannuation death benefit as defined in subsection 307-5(1) of the ITAA 1997.

Section 302-65 of ITAA 1997 states that superannuation income stream benefits received because of the death of a person of whom the recipient is a 'death benefits dependant' is not assessable income and is not exempt income in either or both of the following cases:

a) the recipient was 60 years or over when they receive the benefit; or

b) the deceased died aged 60 or over.

Relevantly, section 302-195 of the ITAA 1997 defines death benefits dependant of a person who has died as:

(a) the deceased persons *spouse or former spouse; or …

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1

Based on the above, the Member's spouse would be a 'death benefits dependant' of the Member for the purposes of section 302-65 of the ITAA 1997.

The Member is over 60 years of age therefore, an MLP paid by the Trustee to the Member's spouse on the death of the Member would be spouse's not assessable and not exempt income. That is, it would be tax free.