Edited version of your written advice

Authorisation Number: 1051361576919

Date of advice: 16 April 2018

Ruling

Subject: Concessional contributions

Question

Following the commutation of a commutable lifetime pension (the Flexi Pension) paid to a member (the Member) of a superannuation fund (the Fund), will any part of the amount allocated to the Member from the reserve which supported the Flexi Pension count as the Member’s concessional contribution under subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997) if that amount is used to immediately commence an account-based pension for the Member?

Answer

Yes.

This ruling applies for the following period:

Income year ending 30 June 2018

The arrangement commences on:

1 July 2017

Relevant facts and circumstances

The Fund is a complying self-managed superannuation fund.

During the 2006 income year, the trustee of the Fund (the Trustee) commenced paying to the Member Flexi Pension.

The Flexi Pension meets the requirements in subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

To support the Flexi Pension, the Trustee established a pension account. According to the actuarial certificates obtained in relation to the Flexi Pension, the amount set aside to support the Flexi Pension includes a reserve (the Reserve).

The Reserve has not been shown separately in the financial statements for the Fund, but included in the Member account.

The Member intends to commute the Flexi Pension using the total of the amounts standing in the pension account (including the Reserve) to immediately commence an account-based pension.

The Trustee will pay at least the minimum pension amount as calculated under subregulation 1.07B(4) of the SISR in the same payment year as the commutation of the Flexi Pension.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 291-25(1)

Income Tax Assessment Act 1997 Subsection 291-25(2)

Income Tax Assessment Act 1997 Subsection 291-25(3)

Income Tax Assessment Regulations 1997 Subregulation 291-25.01

Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(b)

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

Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(6)(g)

Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

Reasons for Decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

In accordance with paragraph 1.06(6)(g) of the SISR, the lump sum available on commutation of the Flexi Pension is limited to the amount calculated using the pension valuation factors (PVFs) in Schedule 1B of the SISR (the maximum commutation value).

If the amount equal to the maximum commutation value of the Flexi Pension is used to commence an account-based pension as soon as practicable, it will not count as the Member’s concessional contribution under subsection 291-25(3) of the ITAA 1997.

Following the commutation of the Flexi Pension, this pension will cease, and the balance of the amount set aside to support the pension (including the Reserve) which is in excess of the maximum commutation value of the pension ceases to be a pension reserve being used solely for the purpose of enabling the Trustee to discharge all or part of its liabilities as soon as they become due in respect of the pension.

As the reserve from which any additional allocations are to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the Income Tax Assessment Regulations 1997 (ITAR 1997), 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 the Member’s concessional contribution in accordance with subsection 291-25(3) of the ITAA 1997 unless one of the other exceptions in subregulation 291-25.01(4) of the ITAR 1997 applies.

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 provides that concessional contributions for a financial year include certain amounts allocated for the individual in accordance with conditions specified in the regulations. The relevant regulation is regulation 291-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

Subregulation 291-25.01(4) of the 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 certain exclusions apply.

Relevantly, paragraph 291-25.01(4)(b) of the ITAR 1997 excludes an amount that is allocated from a reserve if:

(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; …

Meaning of ‘reserve’

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

In ATO Interpretative Decision ATO ID 2015/21 Superannuation ECT: concessional contributions – reserve (ATO ID 2015/21), the Commissioner concluded that 'reserve' for the purposes of subregulation 292-25.01(4) of the ITAR 1997, has a broad meaning and 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. (Note that subregulation 292.25-01 was renumbered to 291.25-01 with effect from March 2017).

When the Member commenced the Flexi Pension, they essentially exchanged an amount of capital for a right to receive an income stream, and a right for a certain amount to be returned to them in the event the pension is commuted.

The amount that the Member exchanged for these rights became an amount that is available to the Trustee, not the Member, to satisfy the Trustee's liability to pay the pension. Therefore, the amount in the pension account, including the reserve, represents a ‘reserve’ for the purposes of regulation 291-25.01 of the ITAR 1997.

Commutation of the income stream

If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of subregulation 291-25.01(4) of the ITAR 1997, one of the exceptions in the subregulation must be met.

Paragraph 291-25.01(4)(b) of the ITAR 1997 refers to amounts being allocated from a reserve used solely for the purpose of enabling a fund to discharge its liabilities in respect of income stream benefits. In this case, the pension reserve created when the Member commenced the Flexi Pension has been used solely to support the payment of the pension.

Sub-subparagraph 291-25.01(4)(b)(ii)(B) of the ITAR 1997 provides an exception to an amount being considered a concessional contribution where an amount is allocated from a reserve supporting the payment of an income stream where 'on the commutation of the income stream... the amount is allocated to the recipient of the income stream, to commence another income stream, as soon as practicable'.

In regard to the commutation of the Flexi Pension, subparagraph 1.06(6)(g) of the SISR states:

if, under the rules, the pension can be commuted - except if conversion is in relation to a commutation to pay a superannuation contributions surcharge, the conversion to a lump sum is limited to a sum that is not greater than the sum determined by applying the appropriate pension valuation factor under Schedule 1B to the pension as if the commencement day were the day on which the commutation occurs.

Accordingly, an amount of a pension reserve (maintained to support the payment of a pension that meets the requirements under subregulation 1.06(6) of the SISR) that exceeds the maximum commutation amount of the pension cannot form part of the commutation lump sum.

In this case, on the commutation of the Flexi Pension, the commutation amount of the pension, calculated by the Actuary, will be allocated to the Member to commence an account-based pension. This commutation amount is limited in accordance with paragraph 1.06(6)(g) of the SISR.

Whilst it is expected that there will be an amount remaining in the reserve following the commutation of the Flexi Pension, the pension will cease at the time of commutation, and consequently, the reserve will no longer be a reserve being used solely to enable the Fund to discharge its liabilities in respect of the payment of the Flexi Pension.

As it is our contention that following the commutation, the reserve from which any additional allocation is to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the ITAR 1997, the exception in that provision will not apply.

Therefore, on the commutation of the Flexi Pension, an amount that is equal to the maximum commutation value of the pension will not count as the Member’s concessional contribution if that amount is used to commence an account-based pension as soon as practicable.

However, the amount in the pension reserve which is in excess of the maximum commutation value of the pension, will count as the Member’s concessional contribution if that amount is allocated to the Member to immediately commence an account- based pension for the Member unless one of the other exceptions in subregulation 291-25.01(4) of ITAR 1997 applies.