Private ruling: Concessional contributions
Date of advice: 29 June 2018
Published: September 2018
Ruling period: Income year ended 30 June 2017; | Income year ending 30 June 2018 | The arrangement commences on: | 1 July 2016

Ruling: Q1: Will any of the amount commuted by the Member to purchase an account based pension be treated as concessional contributions in accordance with subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Fund is a complying self-managed superannuation fund. The Member is a member of the Fund. The Member and spouse are the directors of the corporate trustee (the Trustee) of the Fund. During the 2004 financial year the Trustee commenced paying to the Member a fixed term non-complying pension (Flexi pension) under regulation 1.06(6) of the Superannuation Industry Supervision Regulations 1993 (SISR). The pension schedule provided sets out the pensioner name, date of birth, pension commencement date, the applicable rules details of when the pension can be commuted, the amount of the residual capital value (RCV). 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 (Reserve). The Reserve has not been shown separately in the financial statements for the Fund, but included in the member account. The RCV has not been shown separately in the financial statements for the Fund, but included in the member account. The Flexi pension was commuted back into accumulation phase to commence an account based pension. A copy of the notification of the commutation of the Flexi pension, terms regarding the purchase price of the account based pension and the application for the account based pension have been provided. Any amounts in relation to the Flexi pension in excess of the maximum commutation amount under paragraph 1.06(6)(g) of the SISR were not commuted and have been retained within a reserve account.

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 Subregulation 291-25.01(4) | Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(b) | Income Tax Assessment Regulations 1997 Subparagraph 291-25.01(4)(b)(ii)(A) | Income Tax Assessment Regulations 1997 Subparagraph 291-25.01(4)(b)(ii)(B) | Income Tax Assessment Regulations 1997 Former regulation 292-25.01 | Income Tax Assessment Regulations 1997 Former subregulation 292-25.01(4)

Reasons for decision: Summary: Allocations from a reserve to a member of the fund will be treated as concessional contributions unless the allocations meet one of the exceptions in subregulation 291-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR). The commutation amount of the Flexi pension was determined in accordance with paragraph 1.06(6)(g) of the SISR and used to commence an account based pension. This meets the exception in subparagraph 291-25.01(4)(b)(ii)(B) of the ITAR and the amount allocated will not be treated as a concessional contribution. | 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) 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 an income year include certain amounts allocated for the individual in accordance with conditions specified in the regulations. Relevantly, paragraph 291-25.01(4)(b) of the ITAR 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: (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; … There is no definition of 'reserve' in either the ITAA 1997 or the ITAR. In ATO ID 2015/21 Superannuation ECT: concessional contributions – reserve (ATOID 2015/21), the Commissioner concluded that 'reserve' for the purposes of subregulation 292-25.01(4) of the ITAR (regulation 292-25.01 was renumbered to regulation 291-25.01 in March 2017), 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. In commencing a flexi pension, a member exchanges an amount of capital for certain rights - a right to receive an income stream, and a right for a certain amount to be returned in the event the pension is commuted. The amount that the member exchanges for these rights becomes an amount that is available to the trustee of the fund, not the member, to satisfy the trustee's liability to pay the pension. You stated that to support the Flexi pension, the Trustee established a pension account, and that according to the actuarial certificates obtained in relation to the pension, the amount set aside to support the flexi pension includes a reserve. The Commissioner’s view expressed in ATOID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension' was that the complying lifetime pension account and pension reserve account together represented a reserve (for the purposes of regulation 292-25.01 of the ITAR) to guarantee the complying lifetime pension payments for the term of the complying lifetime pension. Whilst the view set out in ATO ID 2015/22 was in respect of a pension paid under subregulation 1.06(2) of the SISR, the view applies equally to pensions paid under subregulation 1.06(6) of the SISR. Accordingly, regardless of how the trustee may have accounted for the amount set aside to support the Flexi pension, that amount is considered a reserve for the purposes of subregulation 291-25.01(4) of the ITAR. A pension will meet the requirements of subregulation 1.06(6) of the SISR if, amongst other criteria - if the pension can be commuted (except for a limited prescribed purpose), the commutation amount is limited to a sum that is not greater than the amount determined by applying the appropriate pension valuation factor under Schedule 1B to the SISR to the pension as if the commencement day were the day on which the commutation occurs. Consequently, any amounts in excess of this maximum amount that are considered to be maintained to support the subregulation 1.06(6) of the SISR pension, cannot form part of the commutation lump sum. The Notification of Commutation of a Pension and the terms relating to the purchase price of the account based pension show that the commutation amount of the Flexi pension was limited to the amount under paragraph 1.06(6)(g) of the SISR. The commutation amount was then used to commence an account based pension. Therefore, the amount of that allocation will meet the exception in subparagraph 291-25.01(4)(b)(ii)(B) of the ITAR and will not be counted as a concessional contribution.