Edited version of your written advice

Authorisation Number: 1051371971175

Date of advice: 11 May 2018

Ruling

Subject: Concessional contributions

Questions

1. Will a person’s (the Taxpayer’s) salary sacrifice contributions made into a complying superannuation fund (the Plan) be counted towards their NTC for the purposes of Division 291 of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Will Subdivision 291-C of the Income Tax Transitional Provisions Act 1997 (ITTPA 1997) apply to the Taxpayer’s NTC?

3. Will the Commissioner exercise his discretion under section 291-465 of the ITAA 1997 to disregard concessional contributions made in the same circumstances in the 2018-19 and later income years?

Answers

1. Yes

2. Yes, provided the Taxpayer’s defined benefit interest continues to meet the conditions under Subdivision 291-C of the ITTPA 1997

3. No.

This ruling applies for the following period:

Income year ending 30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The Taxpayer is employed by an entity (the Employer).

Prior to 12 May 2009, the Taxpayer joined the Plan.

The Plan has more than five defined benefit members.

The Taxpayer has a defined benefit interest and an accumulation interest (which is not a defined benefit interest) in the Plan.

The Taxpayer is also a member of a self-managed superannuation fund (the SMSF).

In accordance with the Plan’s rules:

● Defined benefit member must contribute to the Plan (at a rate not less a specified amount) of their post-tax superannuation salary or an equivalent pre-tax rate.

● Contributions may be made to the Plan by an employer under a salary sacrifice arrangement between the employer and the defined benefit member.

● Employer is required to contribute to the Plan in respect of the defined benefit member as agreed upon by the Employer, the trustee and the actuary.

● Retirement benefits payable to a defined benefit member from the Plan are defined with reference to the member’s final average salary.

The Plan’s actuary has confirmed that the Taxpayer is a member of a particular category and that their member contributions are subtracted from the calculation of their NTCs.

The trustee of the Plan has advised that the Taxpayer meets the conditions under Subdivision 291-C of the ITTPA 1997.

The Taxpayer has instructed their Employer to:

● pay their superannuation guarantee contributions into the SMSF, and

● commence a salary sacrifice arrangement based on a percentage of their pre-tax superannuation salary as member contributions to their defined benefit interest in the Plan.

Relevant legislative provisions

Income Tax Assessment Act 1997, Subdivision 291-C

Income Tax Assessment Act 1997, section 291-15

Income Tax Assessment Act 1997, section 291-20

Income Tax Assessment Act 1997, section 291-25

Income Tax Assessment Act 1997, section 291-160

Income Tax Assessment Act 1997, section 291-165

Income Tax Assessment Act 1997, section 291-170

Income Tax Assessment Act 1997, section 291-370

Income Tax Assessment Act 1997, section 291-465

Income Tax Assessment Act 1997, Subdivision 293-D

Income Tax Assessment Act 1997, section 293-25

Income Tax Assessment Act 1997, section 293-30

Income Tax Assessment Act 1997, section 293-105

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Regulations 1997, Subdivision 292-D

Income Tax Assessment Regulations 1997, subregulation 292.170.02

Income Tax Assessment Regulations 1997, section 1.7 of Schedule 1A

Income Tax (Transitional Provisions) Act 1997, Subdivision 291-C

Income Tax (Transitional Provisions) Regulations 1997 regulation 292.170.07

Taxation Administration Act 1953 section 96-5 of Schedule 1

Taxation Administration Act 1953 Subdivision 131-A of Schedule 1

Taxation Administration Act 1953 section 357-55 of Schedule 1

Taxation Administration Act 1953 section 357-110 of Schedule 1

Taxation Administration Act 1953 section 359-5 of Schedule 1

Reasons for decision

Question 1

Summary

Salary sacrifice contributions made into the Plan will be counted towards the Taxpayer’s NTC for the purposes of Division 291 of the ITAA 1997.

Detailed reasoning

Concessional contributions

In accordance with subsection 291-25(1) of the ITAA 1997, the amount of a taxpayer’s concessional contributions for a financial year is the sum of:

● each contribution covered by subsection 291-25(2) of the ITAA 1997, and

● each amount covered by subsection 291-25(3) of the ITAA 1997.

A contribution is covered under subsection 291-25(2) of the ITAA 1997 if, relevantly:

● it is made in the financial year to a complying superannuation fund in respect of the person; and

● is included in the assessable income of the superannuation fund; and

● is not specifically excluded from being a concessional contribution under paragraphs 291-25(2)(c) or (d) of the ITAA 1997 (none of which apply in this case).

Subsection 291-25(3) of the ITAA 1997 includes an amount as a concessional contribution where it is allocated to a member by the superannuation provider for the year in accordance with conditions specified in the regulations.

Section 291-20 of the ITAA 1997 provides that a person has excess concessional contributions if the amount of their concessional contributions exceeds their concessional contributions cap for the financial year. The concessional contribution cap for the 2017-18 financial year is $25,000.

Modification for defined benefits interests

However, Subdivision 291-C of the ITAA 1997 contains rules that apply to determine concessional contributions for a person with one or more superannuation interests that are defined benefit interests.

Broadly, ‘defined benefit interest’ is an interest to the extent a person’s entitlement to a superannuation benefit is defined by reference to their remuneration, fixed amounts or specified conversion factors (section 291-175 of the ITAA 1997).

To the extent the Taxpayer’s superannuation benefits in the Plan are determined with reference to their Final Average Salary, they hold a defined benefit interest in the Plan and special rules in Subdivision 291-C of the ITAA 1997 apply to determine their concessional contributions.

The individual is a member of a particular category which, according to the Plan rules, determines their superannuation benefits by reference to the final average salary.

In accordance with subsection 291-165(1) of the ITAA 1997, the amount of a person’s concessional contributions for the financial year is the sum of:

● contributions covered by subsection 291-25(2) and (3) of the ITAA 1997, to the extent which they do not relate to the defined benefit interest(s); and

● the person’s NTC for the financial year in respect of the defined benefit interest(s); and

● the amount (if any) by which a person’s defined benefit contributions for the financial year in respect of the defined benefit interest(s) exceed their NTC.

NTC

Subsection 291-170(1) of the ITAA 1997 provides that a person's NTC for a financial year in respect of a defined benefit interest has the meaning given in the regulations.

Subsection 291-170(2) of the ITAA 1997 indicates that the regulations made for determining a person's NTCs may also provide the method for calculating the amount of NTC.

For superannuation funds with five or more defined benefits members, such as the Plan, subregulation 292.170.02 of the ITAR 1997 specifies that the NTC are contributions determined by the trustee to be NTC, using the method set out in Schedule 1A of the ITAR 1997.’

It was stated that the actuary confirmed that in calculating the NTC they reduce the member contributions from the calculation, this is consistent with the method contained in 1.7 of Schedule 1A to the ITAR 1997 in calculating NTC,

The relevant method for the Plan is contained in section 1.7 of Schedule 1A to the ITAR 1997 which states:

1.7 Standard method for working out amount of notional taxed contributions in respect of a benefit category for an accruing member of the benefit category if the fund benefit is not wholly sourced from an accumulation of contributions made in respect of the member.

If section 1.6 does not apply, the standard method for working out the amount of notional taxed contributions for an accruing member of a benefit category of a defined benefit fund for a financial year is:

new entrant rate is the new entrant rate for the benefit category worked out by an actuary under Parts 2 and 3.

S is the member’s annual superannuation salary relevant to the benefit category on the first day of the financial year on which the member had a defined benefit interest in the scheme.

D is the number of days during the financial year that the member was an accruing member of the benefit category.

M is the amount of member contributions paid by or on behalf of the member in respect of the member’s defined benefit interest in the fund during that part of the financial year that the member was an accruing member of the benefit category, and which are not assessable income of the fund.

In this case, the Taxpayer has changed their member contributions from post-tax contributions to pre-tax contributions. As a result, the member contributions will form a part of the assessable income of the Plan and no longer be shown at ‘M’ in the formula outlined above, thereby increasing the amount of NTC calculation under item 1.7 of Schedule 1A to the ITAR 1997.

As a result the amount of the Taxpayer’s NTCs (before applying the transitional grandfathering rules outline below) will be greater than if the member contributions were made post-tax.

Question 2

Summary

Provided the conditions set out in Subdivision 291-C of the Income Tax (Transitional Provision) Act 1997 (ITTPA 1997) (Transitional grandfathering rules for NTCs) apply and continue to be met, the Taxpayer’s NTC will be taken to be equal to the concessional contribution cap for the financial year.

Transitional rules for NTC (Grandfathering provisions)

Section 291-170 of the ITTPA 1997 applies to certain members with a defined benefit interests that a person held on 5 September 2006 or 12 May 2009 respectively.

For the financial year 2009-10 and later financial years, where a person held a defined benefit interest on 12 May 2009, subsection 291-170(4) of the ITTPA 1997 provides that despite subsection 291-170(1) of the ITAA 1997, a person’s NTC for the financial year in respect of a defined benefit interest are equal to the person’s concessional contributions cap for the financial year if:

(a) the NTC for the financial year in respect of the defined benefit interest exceed the person’s concessional contributions cap for the financial year; and

(b) the conditions (if any) specified in the regulations are satisfied.

Relevantly, regulation 292-170.07 of the ITAR 1997 sets out the conditions which must be met in order for a person to be eligible for the grandfathering provisions and includes the following:

(2) A condition is that the new entrant rate for the defined benefit member, as worked out using Schedule 1A:

(a) has not increased since 12 May 2009; or

(b) has increased since 12 May 2009 only as a result of a change to the rules of the superannuation fund that increases a benefit as a result of a change made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992.

(3) A condition is that the method of calculating superannuation salary:

(a) has not been changed, in a way that would increase the salary, since 12 May 2009 or

(b) has changed since 12 May 2009 only as a result of a change to the rules of the superannuation fund that increases a benefit as a result of a change made to satisfy the requirements of the Superannuation Guarantee (Administration) Act 1992.

(4) If the rate of superannuation salary has increased, since 12 May 2009, by:

(a) more than 50% in 1 year; or

(b) more than 75% over 3 years;

a condition is that the employer-sponsor advises the trustee that the increase in the rate is on an arm's length basis.

(5) A condition is that the trustee or employer-sponsor of the superannuation fund has not exercised a discretion to pay a benefit that is greater than the benefit that was assumed for the purpose of calculating the new entrant rate since 12 May 2009.

(6) For subregulation (4), a trustee must notify the Commissioner, in writing, of an increase in the rate of superannuation salary that exceeds the rate specified in paragraph (4)(a) or (b) as soon as practicable after the increase occurs.

(7) If:

(a) a condition mentioned in subregulation (2) is not satisfied; and

(b) the condition was not satisfied only because:

i. the defined benefit member moved to a new benefit category; and

ii. the move was caused by the necessary application of the rules of the superannuation fund that were, or of legislation that was, in force on 5 September 2006; and

iii. the member had no control over the application of the rules or legislation;

the failure to satisfy the condition is to be disregarded in determining if the conditions of this regulation have been satisfied for the 2009-2010 financial year and subsequent financial years.

Generally, it is for the superannuation fund to determine whether a fund member is eligible for the grandfathering provisions. In this instance, the Plan has advised that the Taxpayer meets the conditions under Subdivision 291-C of the ITTPA 1997. Therefore, the Taxpayer is considered to be eligible for the grandfathering provisions and the Taxpayer’s NTC will be equal to the concessional contributions cap.

Contributions that do not result in excess contributions

As noted above, from 1 July 2017 a further amount may be included in the Taxpayer’s concessional contributions for a financial year under section 291-165(1)(c) of the ITAA 1997. The amount included relates to the Taxpayer’s defined benefit interest and is the difference between the Taxpayer’s defined benefit contributions and their NTC (in the Taxpayer’s circumstances the amount of the concessional contributions cap due to the grandfathering of NTC).

However, for financial years commencing on or after 1 July 2017, under section 291-370 of the ITAA 1997, some contributions and other amounts are treated as being equal to the concessional contributions cap. This means that where those concessional contributions exceed the concessional contributions cap (disregarding increases to a person’s concessional contributions cap due to the carry forward of unused concessional cap space), the sum of those contributions is taken to equal the concessional contributions cap and cannot create an excess.

Under subsection 291-370(2) of the ITAA 1997, when working out a person’s concessional contributions for a financial year, the sum of the following is treated as an amount equal to the concessional contributions cap if they would otherwise have exceed the concessional contributions cap:

● contributions (and other amounts) made in respect of the person in the financial year to a constitutionally protected fund that would otherwise be concessional contributions;

● if any of their NTC for the financial year are worked out under section 291-170 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997), or are not worked out under that section because those NTC did not meet the requirements of paragraph 291-170(2)(b) or (4)(b) of that Act - then the amount of those NTC;

● if their defined benefit contributions for the financial year exceed their NTC for that financial year - the amount of that excess.

Regulation 293-115.15 of the ITAR 1997 applies to an accruing member of a defined benefit superannuation fund that is not a public sector superannuation scheme and states that their ‘defined benefit contributions’ for a financial year in respect of the fund is their NTC for the year disregarding Subdivision 291-C of the Income Tax (Transitional Provisions) Act 1997.

Consequently, in accordance with subsection 291-370(1) of the ITAA 1997, the total of:

● the Taxpayer’s grandfathered NTC, and

● the amount by which the Taxpayer’s defined benefit contributions exceeds the Taxpayer’s grandfathered NTC

will be taken to equal the concessional contributions cap for the financial year ($25,000) and cannot, themselves create an excess.

However, under subsection 291-165 of the ITAA 1997, the Taxpayer's total concessional contributions for the financial year are equal to the sum of:

● concessional contributions for interests that are not defined benefit interests (superannuation guarantee contributions made to the SMSF for the financial year), and

● concessional contributions in relation to the Taxpayer’s defined benefit interests which in this case are limited to the concessional contributions cap ($25,000).

Consequently, the Taxpayer will have excess concessional contributions in the financial year equal to the amount of superannuation guarantee contributions made in that financial year.

It should be noted that excess concessional contributions for the financial year will be counted as non-concessional contributions under section 292-90 of the ITAA 1997 unless 85% of the excess concessional contributions for the financial year is released from superannuation.

Question 3

Summary

The Commissioner will not exercise his discretion under section 291-465 of the ITAA 1997 to disregard contributions made under these circumstances in the 2018-19 and later income years.

Detailed reasoning

Section 291-465 of the ITAA 1997 provides the Commissioner with a discretion to make a written determination that, for the purposes of working out an individual’s excess concessional contributions for a financial year, all or part of a person’s concessional contributions in a financial year be either disregarded or allocated to another financial year.

However, in accordance with subsection 291-465(2) of the ITAA 1997, the Commissioner may make the determination only if:

● a person applies for the determination in accordance with section 291-465 of the ITAA 1997; and

● the Commissioner considers that:

○ there are special circumstances; and

○ the making of the determination is consistent with Divisions 291 and 292 of the ITAA 1997.

In making the determination, the Commissioner may have regard to the following (subsection 291-465(3) of the ITAA 1997):

● whether a contributions would be more appropriately allocated to another financial year;

● whether it was reasonably foreseeable, when a relevant contribution was made, that a person would have excess concession or non-concessional contributions for the relevant financial year; and in particular:

● if the relevant contribution is made in respect of the person by another individual – the terms of any agreement or arrangement between the person and that individual as to the amount and the timing of the contribution;

● the extent to which the person had control over the making of the contribution; and

● any other relevant matters.

Based on the above, there are two preconditions to a determination exercising the discretion under section 291-465 of the ITAA 1997, namely:

● the presence of ‘special circumstances’; and

● the determination achieving an outcome which is consistent with the object of Division 291 of the ITAA 1997.

Special circumstances

The meaning of the expression 'special circumstances' is not defined in the ITAA 1997 but has been considered in case law in a variety of legislative contexts. The principles that emerge from the cases are that:

● it is not possible to lay down precise rules for what constitutes special circumstances

● the core idea of special circumstances is that there is something unusual to take the case outside the ordinary course, and

● in determining whether there are special circumstances in the context of the exercise of a discretion a decision maker must bear in mind the purpose for which the discretion is given.

Taking the above into consideration, it is the Commissioner’s view that special circumstances are factors that are unusual or out of the ordinary and which justify the making of an exception to the general application of the legislation because that operation would be unjust, unreasonable or otherwise inappropriate (Practice Statement Law Administration 2008/1 (PS LA 2008/1).

Consequently, the following would not be considered to be special circumstances:

● Financial hardship – the imposition of the tax and corresponding liability to pay the amount assessed is an intended consequence of the law designed to discourage excess contribution.

● Ignorance of the law - unless other factors exist which would make the ignorance or misconception reasonable or understandable in the circumstances.

● Incorrect professional advice - unless there were other special factors leading to the mistake.

● Retrospectivity of law or adverse effects of legislative changes.

Object of Division 291 of the ITAA 1997

The object of Division 291 of the ITAA 1997 is to ensure, in relation to concessional contributions to superannuation that the amount of concessionally taxed superannuation benefits that a person receives results from contributions that have been made gradually over the course of the person’s life.

In general, the Commissioner may consider the object of Division 291 of the ITAA 1997 is achieved if, apart from the special circumstances, the relevant contributions cap would not have been breached and the special circumstances are such that, if they justified a determination to disregard or reallocate excess contributions in all cases, the effect would not be to undermine the achievement of the object of the Division.

Where the special circumstances are such that a contribution is more properly referable to a different financial year, the Commissioner may be more likely to determine that an amount should be allocated to another financial year, rather than be disregarded altogether. On the other hand, where the special circumstances relate to the amount of the contribution, the Commissioner may be more likely to determine that an amount should be disregarded rather than reallocated to another year.

In this case, the facts do not indicate special circumstances or that the imposition of tax would be unjust, unreasonable or inappropriate. The Taxpayer has made an agreement with the Employer with regard to the terms of the salary sacrifice contributions and could reasonably expect that the amount of those contributions would exceed the concessional contributions cap.

The Commissioner may only disregard excess concessional contributions if he is satisfied that a person has met the conditions of section 291-465 of the ITAA 1997. There is no discretion conferred by the legislation to allow the Commissioner to disregard excess concessional contributions for any other reason.

Therefore, the Commissioner is unlikely to exercise his discretion under section 291-465 of the ITAA 1997 to disregard concessional contributions made in the same circumstances in the 2018-19 and later income years.