Edited version of private advice

Authorisation Number: 1051859274046

Date of advice: 2 July 2021

Ruling

Subject: Exempt income of superannuation funds

Question

Is the proposed methodology to be adopted by the taxpayer in calculating its exempt income in accordance with subsection 295-400(3) of the Income Tax Assessment Act 1997 (ITAA 1997).

Answer

Yes

This ruling applies for the following period (s):

A number of income years

The scheme commences on:

An income year

Relevant facts and circumstances

The taxpayer (Trust X) is a pooled superannuation trust (PST) as defined in section 48 of the Superannuation Industry (Supervision) Act 1993 (SISA) and a complying superannuation entity pursuant to section 995-1 of the ITAA 1997.

All unitholders of Trust X are complying superannuation funds.

Units available for acquisition by the unitholders are backed by a range of investments options.

All investments are pooled in Trust X (i.e. there are no discrete or segregated portfolios of investments referable only to particular unitholders), and the trustee of Trust X bears the tax liability that arises in respect of those investments in accordance with Division 295.

Units available for acquisition by the unitholders of Trust X include taxed units and untaxed units for their members who are in accumulation phase or pension phase.

Trust X proposed to use the alternative methodology in subsection 295-400(3), to calculate the percentage of its ECPI based on its interpretation of the intent of the provision.

Trust X is to obtain validation of this percentage from an externally appointed actuary to ensure that the ECPI percentage is calculated appropriately.

Relevant legislative provisions

Division 295 of the ITAA 1997

section 295-385 of the ITAA 1997

section 295-390 of the ITAA 1997

subsection 295-400(1) of the ITAA 1997

subsection 295-400(3) of the ITAA 1997

section 17A of the SISA

section 17B of the SISA

section 45 of the SISA

section 48 of the SISA

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 unless otherwise specified.

A complying superannuation fund is entitled to an exemption for so much of its ordinary income or statutory income that is attributable to its current pension liabilities. The exempt income is generally referred to as exempt current pension income (ECPI). Subdivision 295-F sets out the relevant methods in calculating the exempt income amount.

Under section 295-385, a complying superannuation fund is exempt from tax on income from its segregated assets set aside in order to meet current pension liabilities.

Section 295-390 outlines the proportionate method which provides a formula for calculating the proportion of exempt pension income. The proportion of exempt income is expressed as the proportion of the average value of current pension liabilities (excluding liabilities for which segregated current pension assets are held) to the average value of superannuation liabilities.

Specifically, for pooled superannuation trusts, subsection 295-400(1) sets out a formula for calculating the proportion of exempt income of a pooled superannuation trust based on the average number of units held in the pooled superannuation trust that are segregated current pension assets. It provides:

295-400(1)

This proportion of the *ordinary income and *statutory income that would otherwise be assessable income of a *pooled superannuation trust is *exempt income:

Subsection 295-400(3) provides an alternative method to exempt amounts of assessable income of a pooled superannuation trust. It states:

Alternative exemption

295-400(3)

However, the trustee of the *pooled superannuation trust can choose that a different amount be *exempt income of the trust under this section if a percentage of the assessable income of the trust would have been exempt income under section 295-385 or 295-390 if it had been *derived instead by the unitholders in the trust in proportion to their holdings.

Trust X provided information to the Commissioner which illustrates that the approach to be used to self-assess its ECPI is valid and workable and that the exempt pension income calculated under Trust X's approach is proportionate to the amount that would have been derived by the unitholders directly.

Having regard to the information provided, the Commissioner is satisfied that the proposed methodology to be used by Trust X in calculating its ECPI is in accordance with subsection 295-400(3) and the policy intent of the legislation.