ATO ID 2008/97: Excess concessional contributions tax: notional taxed contributions - exercise of a discretion under Part 4 of Schedule 1A to the ITAR 1997
Date of decision: 3 June 2008
Year of income: Year ended 30 June 2008
Business line: Superannuation

Issue
Is a choice made by a defined benefit member between a lump sum or pension benefit considered to be the exercise of a discretion as referred to in Part 4 of Schedule 1A to the Income Tax Assessment Regulations 1997 (ITAR 1997)?

Decision
No. The choice made by the member is not considered to be the exercise of a discretion as referred to in Part 4 of Schedule 1A to the ITAR 1997. Therefore W is equal to zero in the formula for working out the total amount of notional taxed contributions for the financial year in section 1.8 of Part 1 of Schedule 1A to the ITAR 1997.

Facts
The member was an accruing member of a defined benefit superannuation fund. Upon retirement, the member had a choice of receiving either a lump sum payment or a superannuation pension. The member retired and chose to receive a lump sum payment.

Reasons for decision
Summary: Section 1.8 of Part 1 of Schedule 1A to the ITAR 1997 sets out the standard method for working out the total amount of notional taxed contributions for an accruing member of a defined benefit fund for a financial year as being: T + (1.2 × (W + X + Y + Z)) where W is an amount worked out on advice from an actuary under Part 4 of Schedule 1A of the ITAR 1997. Part 4 of Schedule 1A to the ITAR 1997 deals with situations involving the exercise of a discretion to pay a benefit (in certain circumstances) which is greater than the benefit assumed in calculating the new entrant rate under Part 2 of Schedule 1A of the ITAR 1997. The Commissioner's view is that the choice made by the member (that is, in choosing the type of benefit they receive) does not constitute the exercise of a discretion for the purposes of Part 4 of Schedule 1A to the ITAR 1997. Part 4 of Schedule 1A to the ITAR 1997 therefore does not apply to the case at hand, and item 'W' equals zero in section 1.8 of Part 1 of Schedule 1A to the ITAR 1997. Furthermore, under Part 2 of Schedule 1A to the ITAR 1997, the new entrant rate is calculated using the present value of the fund benefit payable on voluntary exit of the fund. Under subsection 2.1(5) of Part 2 of Schedule 1A the present value of the fund benefit is to be calculated having regard to the rules and practice of the fund including (amongst other things) member options. The Commissioner considers the take up rate of a member option to choose between a pension and a lump sum would be a member option that would have been regarded in calculating the present value of the fund benefit used in calculating the new entrant rate.

Legislative references: Income Tax Regulations 1997 section 1.8 of Part 1 of Schedule 1A Part 2 of Schedule 1A subsection 2.1(5) of Part 2 of Schedule 1A Part 4 of Schedule 1A
Subject references: Concessional contributions Concessional contributions cap Defined benefit superannuation funds Excess concessional contributions Superannuation excess contributions tax