Private ruling: Concessional contributions
Published: April 2014

Ruling: Q1: Will any part of the full commutation of a lifetime complying pension (LCP) to a market linked pension (MLP) and then subsequent split of 100% of the MLP to the taxpayer's spouse, as a result of a matrimonial breakdown, be treated as a concessional contribution for the purposes of the concessional contributions cap? Advice/Answer No.

Relevant facts and circumstances: Over 15 years ago, a self-managed superannuation fund (the Fund) was established. The members of the Fund are the directors of the corporate trustee of the Fund. Member 1 and Member 2 are retired and receiving pensions and have no accumulation accounts in the Fund. The pension balances for each member for the year ended 30 June 2013 have been provided. The members have separated and are currently finalising their property settlement, which includes splitting superannuation entitlements. The draft consent orders split the superannuation entitlements as follows: 1. Split a percentage of Member 1's entitlements held within the Fund to Member 2. 2. Split a percentage of Member 2's benefits in the Fund to Member 1. 3. Member 2 to split a further specified base amount to Member 1. Subject to the outcome of this application, it is envisaged that prior to the orders being executed Member 1's lifetime complying pension will be fully commuted and the entire proceeds backing the pension will be used to commence a market linked pension for Member 1. This pension is to continue for a period of time and then be dealt with in accordance with the orders to split Member 1's entitlements as outlined above. The required minimum pension would be paid prior to the full commutation. You have provided a copy of the Draft Orders which state as follows: 1) Member 1's existing lifetime complying pension, being paid from the Fund, is to be converted into a market linked pension. 2) The splittable payments being made to each member are being made in accordance with section 90MT(1) of the Family Law Act 1975 and within the meaning of section 90ME. 3) Each member will be entitled to be paid a percentage of that splittable payment by the Trustees of the Fund. 4) All transfers are to be satisfied by an in species transfer. The splitting payments are to be implemented consecutively after establishing the value of the member accounts as at the operative date. 5) The operative time is the date of transfer of the transferable benefits, which is to be completed within a specified number of days from the date of these orders and is to be effective from a date in 2014. 6) If the superannuation split does not occur within the time limit specified above, interest shall accrue on Member 1's entitlement from Member 2's entitlement calculated in accordance with the rate set under reg 45D of the Family Law (Superannuation) Regulations until the actual date of payment. 7) Member 2 will indemnify Member 1 against any liability rising in relation to the operation of the Fund from the date the fund commenced. 8) Member 1 will resign as a member from the Fund and as a director of the trustee company. 9) Member 2 and Member 1 will do all such acts and things and sign all such documents that are necessary for the splitting of the Fund in accordance with these orders. 10) The signing of these orders by Member 2 and Member 1 as trustees of the Fund satisfies the procedural fairness requirements of S 90MZD of the Family Law Act. An actuary has provided a 'Defined Pension Conversion Report Statement' for Member 1. Some of the actuary's major observations and recommendations are stated as follows: • The actuary recommend the minimum conversion amount to the market linked / TAP pension should be a specified amount and the maximum is the full amount backing the lifetime pension. • If the conversion amount is not the total value of the assets backing the pension, please note carefully how the ATO will treat the use of reserves for a fully retired person. • The Market Linked Pension need to meet the ABP minimum drawdown level, has considerable scope to choose the payment duration and utilise the plus/minus percentage variation allowed. • In view of the size of this transaction, it would be prudent to seek a private ruling from the ATO that the chosen conversion terms will not lead to an excess contribution tax liability. The actuarial report shows the assets backing the defined pension sub-fund of a lifetime pension for Member 1 and a life expectancy pension for Member 2. The actuary recommended a minimum conversion start balance of the market linked pension exchange for Member 1's lifetime pension of the High Probability Value of a specified amount, to a maximum of the full reserves backing the current pension. You have confirmed that the entire proceeds backing Member 1's lifetime complying pension (that is, the high probability value and the surplus reserves) will be commuted to commence a market linked pension.

Relevant legislative provisions: Family Law Act 1975 Paragraph 90MT(1)(b) | Income Tax Assessment Act 1997 Section 291-25 | Income Tax Assessment Act 1997 Subsection 291-25(3) | Income Tax Assessment Regulations 1997 Regulation 292-25.01 | Income Tax Assessment Regulations 1997 Subregulation 292-25.01(4) | Income Tax Assessment Regulations 1997 sub-subparagraph 292-25-01(4)(b)(ii)(B ) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(2) | Superannuation Industry (Supervision) Regulations 1994 Subparagraph 1.06(2)(e)(iii) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(9A )

Reasons for decision: Summary: The entire value of the complying lifetime pension account, including the surplus reserves backing the pension which are transferred to commence a market-linked pension, is excluded from being a concessional contribution. | Detailed Reasoning - Complying lifetime pension: A complying lifetime pension is a pension paid under subregulation 1.06(2) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). The circumstances under which a lifetime pension may be commuted are limited. They may be commuted to pay the superannuation contributions surcharge, to give effect to a payment split or a release authority in relation to excess contributions tax and in some cases for the benefit of the reversionary beneficiary. Under subparagraph 1.06(2)(e)(iii) of the SISR, a complying lifetime pension may be commuted if the super lump sum resulting from the commutation is transferred directly to purchase another income stream of a type specified in that regulation, for example a market linked pension. Section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997) provides what amounts are included as concessional contributions for an income year. An amount in a complying super plan allocated by a super provider for a member is treated as a concessional contribution under subsection 291-25(3) of ITAA 1997, if the amount is allocated in accordance with regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997). That is, regulation 292-25.01 sets out the conditions for concessional contributions allocated in accordance with subsection 291-25(3). Subregulation 292-25.01(4) of the ITAR 1997 provides concessional contribution exceptions in respect of allocations from reserves. Specifically sub-subparagraph 292-25-01(4)(b)(ii)(B) of the ITAR 1997 provides that an allocation from a reserve will be included in a person's concessional contributions for an income year unless: • 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 super income stream benefits that are payable by the fund at that time, and • 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 stream, to commence another income stream, as soon as practicable. In ATO ID 2012/84, the Commissioner's view is that '… the complying lifetime pension account and pension reserve account together represent a reserve for the purposes of regulation 292-25.01 of the ITAR 1997, an amount allocated from either of the two accounts may satisfy sub-subparagraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997.' As the commuted lifetime complying pension was used to commence a market linked pension, that amount was not a concessional contribution pursuant to subregulation 292-25.01(4) of the ITAR 1997. However, as the pension reserve account was used to purchase an account based pension (which only meets the requirements under subregulation 1.06(9A) of the SISR and not subparagraph 1.06(2)(e)(iii) of the SISR) this amount would be a concessional contribution as it would not meet the exclusion under subregulation 292-25.01(4) of the ITAR 1997. If a lifetime complying pension and an allocation from a reserve are used to purchase a market linked pension, after commutation, the whole amount would meet the exception under sub-subparagraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997 and no amount would be counted as concessional contributions for the relevant income year. As advised by the agent, this is the situation in this case. Therefore, as the total of the lump sum resulting the commutation of Member 1's lifetime complying pension and the reserves will be used to commence a market linked pension, the exception under subregulation 292-25.01(4) of the ITAR 1997 is satisfied. Subsequently, no amount will be counted towards either Member 1's concessional or non-concessional contributions caps for the relevant income year. Furthermore, the legislation contains exceptions in respect of family law superannuation payments. Therefore, the splits detailed in the proposed draft order to be made in accordance with paragraph 90MT(1)(b) of the Family Law Act 1975 as a result of the marriage breakdown will not be counted as either concessional or non-concessional contributions in the relevant income year.