Edited version of your written advice

Authorisation Number: 1051240652485

Date of advice: 23 June 2017

Ruling

Subject: Commutation of a lifetime pension

Question

Following the full commutation of the member’s lifetime pension, if the remaining balance in reserve which previously supported the payment of the pension is allocated to the member to commence an account based pension, will the amount of the allocation be a concessional contribution in accordance with section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, if the balance of the reserve account is allocated to the member to commence an account based pension, the amount of the allocation will be a concessional contribution

This ruling applies for the following period:

1 June 2017 to 30 June 2018

The scheme commenced on:

Scheme has not yet commenced

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. The complying self-managed superannuation fund (the Fund) is a single member fund.

2. The member commenced a lifetime pension (the Pension) on 1 July 200X.

3. An actuarial certification states the Pension is a commutable lifetime pension pursuant to subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

4. The member wishes to commute the total amount of the Pension to immediately commence an account based pension that meets the rules under subregulation 1.06(9A) of the SISR.

5. The maximum commutable amount of the Pension has been calculated in accordance with paragraph 1.06(6)(g) of the SISR.

6. The value of the assets supporting the Pension exceeds the maximum commutable amount.

7. The excess amount will be maintained in a Fund reserve.

Reasons for decision

Detailed reasoning

8. 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) and each amount covered under subsection 291-25(3).

9. Subsection 291-25(3) of the ITAA 1997 provides that concessional contributions for an income year also include certain amounts allocated for the individual in accordance with conditions specified in the regulations.

10. Paragraph 292-25.01(4)(b) of the Income Tax Assessment Regulations 1997 (ITAR 1997) provides that an amount allocated from a reserve is treated as being allocated in a way covered by subsection 291-25(3) of the ITAA 1997 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 steam to commence another income stream, as soon as practicable; …

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

12. In ATO ID 2015/21 Superannuation ECT: concessional contributions – reserve (ATOID 2015/21), the Commissioner concluded that 'reserve' for the purposes of subregulation 292-25.01(4) of the ITAR 1997, 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.

13. On 1 July 2005 the member commenced a commutable lifetime pension pursuant to subregulation 1.06(6) of the SISR.

14. A pension meeting the requirements of subregulation 1.06(6) of the SISR may be commuted. Except for a limited prescribed purpose, the commutation amount is limited to a sum that is not greater than the amount 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.

15. Accordingly, any amount in excess of the Schedule 1B amount that had been maintained to support the 1.06(6) pension, cannot form part of the commutation lump sum. To the extent that the rules of the Fund purport to provide otherwise, they will not meet the standards of 1.06(6) of the SISR.

16. In commencing these pensions, a member essentially exchanges an amount of capital for certain rights - a right to receive an income stream, and a right for a certain amount to be returned in the event the pension is commuted.

17. The amount that the member exchanges for these rights becomes an amount that is available to the trustee of the fund, not the member, to satisfy the trustee's liability to pay the pension.

18. The view in ATOID 2015/21 is reiterated in ATOID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension' (ATOID 2015/22). Whilst the view set out in ATO ID 2015/22 was in respect of a pension paid under subregulation 1.06(2) of the SISR, the view applies equally to pensions paid under subregulation 1.06(6). That is, the amount exchanged is an amount set aside to be used for a particular purpose.

19. The member wishes to commute the total amount of the Pension to their accumulation account to immediately commence an account based pension.

20. The SISR provides no restriction on how the lump sum resulting from the full commutation of a 1.06(6) pension must be dealt with by the member within the fund. That is, there is no requirement that the lump sum payable on commutation is applied to commence any particular kind of pension. The commutation lump sum can therefore be applied to start a new account based pension from the fund.

21. The value of the assets supporting the member’s Pension exceeds the maximum commutable amount.

22. The excess amount will be maintained in a Fund reserve.

23. Whilst there will be an amount remaining in a reserve following the commutation of the Pension, the Pension will cease at that time, and consequently, the reserve will not be a reserve used solely for the purpose of enabling the fund to discharge its pension liabilities.

24. Regulation 5.04(2) of the SISR sets out that for an accumulation fund a member’s minimum benefits are all the member’s benefits in the fund. When the member exchanged the capital that was his superannuation interest for the right to be paid the Pension under regulation 1.06(6), the Pension then formed his minimum benefits. This included the limitation that only so much was payable as a commutation lump sum. Therefore the Fund will not contravene the minimum benefit requirements where it commutes the member’s Pension in full and the amount above the maximum provided by Schedule 1B is left in a reserve.

Allocation from reserve

25. The Trustee of the Fund wishes to allocate the balance of the reserve to the member to commence an account based pension.

26. As the reserve from which the allocation is to be made is not a reserve which meets the requirements of paragraph 292-25.01(4)(b) of the ITAR 1997, the exception in that provision to the allocation being a concessional contribution does not apply.

27. Paragraph 292-25.01(4)(a) of the ITAR 1997 also provides an exception with respect to an allocation made from a reserve where the following conditions are met:

● The amount is allocated in a fair and reasonable manner to an account for every member of the fund, and

● The amount that is allocated for the financial year is less than 5% of the value of the member’s interest in the fund at the time of allocation

28. The amount allocated to the Fund’s reserve is greater than 5% of the value of the member’s interest in the Fund.

29. As an allocation of the total amount from the Fund’s reserve would exceed 5% of the member’s interest in the Fund, paragraph 292-25.01(4)(a) of the ITAR 1997 would also not apply to exempt the allocation from the reserve being a concessional contribution.

30. Therefore, if the balance of the Fund’s reserve account is allocated to the member to commence an account based pension, the amount of the allocation will be a concessional contribution.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 291-25

Income Tax Assessment Regulations 1997 regulation 292-25.01

Income Tax Assessment Regulations 1997 subregulation 292-25.01(4)

Superannuation Industry (Supervision) Regulations 1994 subregulation 1.06(6)

We followed these ATO view documents

ATO ID 2015/21 Superannuation ECT: concessional contributions – reserve

ATOID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension'