ATO ID 2015/21: ECT: concessional contributions - reserve
Date of decision: 17 June 2015
Year of income: Year ending 30 June 2014
Business line: Superannuation

Issue
When determining the amount of a person's concessional contributions covered under subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997) is the self-insurance reserve maintained by the trustee of a particular fund a 'reserve' for the purpose of subregulation 292-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR 1997)?

Decision
Yes. In determining the amount of a person's concessional contributions covered under subsection 291-25(3) of the ITAA 1997 the self-insurance reserve maintained by the trustee of the fund is a 'reserve' for the purpose of subregulation 292-25.01(4) [1] of the ITAR 1997.

Facts
The fund is a complying superannuation fund. Each member of the fund has an accumulation account to which employer and member contributions are required to be made in accordance with the rules of the fund. The trust deed of the fund authorises the trustee to pay specified benefits (called the 'disability payments' in this Interpretative Decision) if a member is temporarily or permanently disabled such that the member is unable to work. Further, the deed provides that a member is entitled to death, resignation, or retirement benefits (called the 'end benefits') that are not adversely affected by any period of non-service during which the member receives disability payments. The complying superannuation fund does not hold insurance policies to fund either the disability payments or to fund the end benefits of a member who is disabled. Instead, the fund self-insures against these liabilities. To finance the self-insurance the fund's deed authorises the trustee to deduct a monthly insurance charge from each member's account. A corresponding amount is recorded in an account identified as the self-insurance reserve. The fund's financial reports recognise the self-insurance reserve as a reserve. The amount in the self-insurance reserve is used to meet current disability liabilities and to cover liabilities that may arise from the happening of insured events in the future. While a member is in receipt of disability payments no employer or member contributions are made to the account of the member. However each month the trustee credits an amount to the account of a member who is receiving disability payments. The amount is equal to the contributions that both the member and the member's employer were required to make immediately before the member's disability arose. The crediting of those amounts to the member's account ensures the trustee complies with its obligation to ensure the member's end benefits are not adversely affected by any period of non-service during which they receive disability payments. Each amount is allocated from the self-insurance reserve. In accordance with the deed, disability payments are made directly from the self-insurance reserve to members who have suffered a disability. These payments have no effect on the member's account.

Reasons for decision
Summary: 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 includes in a person's concessional contributions an amount in a complying superannuation plan that is allocated for the person in accordance with the conditions specified in the regulations. The relevant regulation is regulation 292-25.01 of the ITAR 1997. Subregulation 292-25.01(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 an exclusion in subregulation 292-25.01(4) of the ITAR 1997 applies. There is no definition of 'reserve' in the ITAA 1997 or the ITAR 1997. The meaning of 'reserve' for the purposes of regulation 292-25.01 of the ITAR 1997 is to be determined by reference to its ordinary meaning, the context in which the word is used in that regulation and the purpose for which the regulation was enacted. (See Project Blue Sky Inc v. Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28) According to the Macquarie Dictionary, 3rd edition 1998 a 'reserve (noun)' is 'an amount of capital retained by a company to meet contingencies, or for any other purpose to which the profits of the company may be profitably applied... something reserved, as for some purpose or contingency; a store or stock'. The Australian Prudential Regulation Authority (APRA) has issued Prudential Practice Guide SPG 222: Management of reserves (SPG 222) which discusses the use of reserves in superannuation entities for the purposes of complying with Superannuation Industry (Supervision) Act 1993 (SISA) and Superannuation Industry (Supervision) Regulations 1994 (SISR). It describes reserves as monies which form part of the net assets of the fund and which have been set aside for a clearly stated purpose. It lists the most common types of reserves as operational risk reserves, self-insurance reserves and investment reserves. However, SPG 222 also states that while reserves in superannuation funds are monies that have not been allocated to members not all unallocated monies are reserves. It states that unallocated monies that are not reserves include suspense accounts used to record contributions and roll-overs pending allocation to members. The meaning of 'reserves' for the purposes of SISA was discussed in Re VBN and APRA (No 5) [2006] AATA 710 by Deputy President Forgie and Senior Member Pascoe of the AAT. In a joint decision they considered at paragraph 442 that the word 'reserves' in section 115 of the SISA did not have a specialised meaning that differs from its ordinary English meaning. They observed that both standard and specialist dictionaries gave consistent meanings that conveyed the notion of 'actual monetary funds or assets' that were 'put aside to meet future contingencies and demands'. Therefore, for the purposes of subregulation 292-25.01(4) of the ITAR 1997, 'reserve' 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. However, there is evidence that 'reserve' as used in subregulation 292-25.01(4) of the ITAR 1997 is intended to have a broader meaning than that. For example, the Explanatory Statement to Income Tax Assessment Amendment Regulations 2007 (No. 3) refers to employer contributions that are accepted into a reserve prior to allocation to a member in compliance with Division 7.2 of the SISR. That is, what the Explanatory Statement refers to as a reserve is characterised in the Prudential Practice Guide SPG 222 as a suspense account used to record contributions pending their allocation to members. Further, subregulation 292-25.01(4) of the ITAR 1997 was amended by Income Tax Assessment Amendment Regulations 2007 (No. 6) to include 'other than an amount that is covered by subregulation (2)' so that the exclusions in subregulation 292-25.01(4) would not apply to contributions allocated under Division 7.2 of the SISR. That is, for the purpose of regulation 292-25.01 of the ITAR 1997, contributions received by the fund, but not yet allocated to the member under Division 7.2 of the SISR, were considered to represent a reserve. The Explanatory Statement to the amending regulations stated that without the amendment the exclusions under subregulation 292-25.01(4) could apply to the contributions that are required to be allocated to a member under Division 7.2 of the SISR. According to section 291-5 of the ITAA 1997 the object of Division 291 of the ITAA 1997 is to ensure, in relation to concessional contributions, the amount of concessionally taxed superannuation benefits a person receives results from contributions that have been made gradually over the course of the person's life. Unless specifically excluded, contributions made by or on behalf of an individual are intended to be counted as either concessional contributions or non-concessional contributions depending on whether the contribution is included in the fund's assessable income. In addition, other amounts allocated to a member may also be included in the definitions of concessional contributions and non-concessional contributions by virtue of regulations (see subsection 291-25(3) and paragraph 292-90(4)(a) of the ITAA 1997). Paragraph 1.66 of the Explanatory Memorandum to Tax Laws Amendment (Simplified Superannuation) Bill 2006 states that additional amounts allocated to an individual are included in concessional contributions to ensure the integrity of the concessional contributions cap. Amounts allocated to an individual by a superannuation provider in excess of 'an amount that reasonably reflects the contributions made by, or on behalf of, the individual and investment earnings in relation to the individual's superannuation interest' are included in concessional contributions. In the Commissioner's view 'reserve' as used in regulation 292-25.01 of the ITAR 1997 should be given a broad meaning to maintain the integrity of the contributions caps. This is consistent with the purpose of Division 291 of the ITAA 1997 and the wording of regulation 292-25.01 of the ITAR 1997, in particular the express link made from subregulation 292-25.01(4) of the ITAR 1997 to subregulation 292-25.01(2) of the ITAR 1997. It is also consistent with the statements about excess contributions tax and allocations at paragraphs 1.61 to 1.68 of the Explanatory Memorandum to Tax Laws Amendment (Simplified Superannuation) Bill 2006 and in the Explanatory Statements to Income Tax Assessment Amendment Regulations 2007 (No. 3) and Income Tax Assessment Amendment Regulations 2007 (No. 6). It is not necessary to decide the precise scope of the meaning of 'reserve' as used in subregulation 292-25.01(4) of the ITAR 1997 to answer the question in this Interpretative Decision. In this case, the self-insurance reserve is a 'reserve' for the purpose of subregulation 292-25.01(4) of the ITAR 1997. It comprises amounts that are set aside from the amounts allocated to the accounts of the members. The amounts set aside are used for particular purposes, being to fund the member's end benefits and to pay the disability benefits. This conclusion does not rely upon the fact that the reserve was created by deducting amounts from the accounts of members. The process by which any amount is set aside is not central to determining if there is a reserve. It follows that allocations by the trustee from the self-insurance reserve to a member's account are allocations from a reserve for the purposes of subregulation 292-25.01(4) of the ITAR 1997.

Legislative references: Income Tax Assessment Act 1997 Division 291 section 291-5 subsection 291-25(1) subsection 291-25(2) subsection 291-25(3) paragraph 292-90(4)(a)
Case references: Re VBN and APRA (No 5) [2006] AATA 710
Other references: Prudential Practice Guide SPG 222: Management of reserves, Australian Prudential Regulation Authority Macquarie Dictionary 3rd edition 1998 Explanatory Statement to Income Tax Assessment Amendment Regulations 2007 (No. 3) Explanatory Statement to Income Tax Assessment Amendment Regulations 2007 (No. 6) Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006
Subject references: Excess concessional contributions Concessional contributions