Private ruling: Allocation from a reserve directly to a member
Date of advice: 15 November 2018
Published: February 2019
Ruling period: Year ended 30 June 2019
Date scheme commenced: 1 July 2018

Ruling: Q1: Is the lump sum payment that the trustee intends to make directly to the member from the reserve an amount that is covered by subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, the payment from the reserve to the member will be an amount covered by subsection 291-25(3) of the ITAA 1997, and accordingly it will be a concessional contribution. | Q2: Is the amount a superannuation lump sum payment? | A2: Yes, the payment is a superannuation lump sum benefit.

Relevant facts and circumstances: 1. The fund is a self-managed superannuation fund (the Fund). 2. The Fund has four members including: a. Member 1: aged 8X b. Member 2: aged 8X 3. In July 2004, Member 1 and Member 2 each commenced five superannuation streams (Flexi Pensions) with the following features: a. each Flexi Pension complies with regulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) b. each Flexi Pension is payable to the relevant member for the remainder of their life, and each Flexi Pension incorporates a reversionary pensioner; and c. the payments from each Flexi Pension are indexed annually at the rate of CPI (ie. maximum indexation is the average rate of inflation over the last three years). 4. In addition to five Flexi Pensions, Member 1 and Member 2 each have an account-based pension (ie, a pension complying with regulation 1.06(6)(9A)(a) of the SISR). 5. Member 1 and Member 2 each intend to commute their five Flexi Pensions and either retain the commutation values in an accumulation account within the Fund, or commence an account-based pension from the Fund with the commutation values, or some combination. 6. Once the Flexi Pensions are commuted, the Trustee of the Fund will: a. no longer hold any liabilities in relation to the Flexi Pension; however b. it will hold leftover capital that formerly supported the Flexi Pension liabilities. This leftover capital will constitute a reserve for the purposes of regulation 1.03(1) of the SISR and section 115 of the SISA. 7. Given the advanced aged of Member 1 and Member 2, the Trustee intends paying a superannuation lump sum benefit to each of them directly from the Reserve. 8. In accordance with the governing rules of the Fund, the Trustee can pay a lump sum benefit directly form the Reserve to a Member. Any lump sum benefit paid to a Member directly from the Reserve will not create a “Members Account” within the Fund. 9. The amount of the Lump Sum Benefit paid to Member 1 and Member 2 would equate to the balance of the Reserve at the time the Lump Sum benefits are paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 291-25(3) | Income Tax Assessment Act 1997 subsection 307-5(1) | Income Tax Assessment Act 1997 section 307-65 | Income Tax Assessment Regulations 1997 subregulation 291-25.01(4) | Income Tax Assessment Regulations 1997 paragraph 291-25.01(4)(a) | Income Tax Assessment Regulations 1997 paragraph 291-25.01(4)(b) | Superannuation Industry (Supervision) Regulations 1993 subregulation 1.06(6)

Reasons for decision: Summary: 10. The allocation will not meet the exception, and will be considered a concessional contribution in accordance with subsection 291-25-(3) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 11. 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. 12. Subregulation 291-25.01(4) of the Income Tax Assessment Regulations 1997 (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 one of the exceptions in the subregulation applies. 13. In this case, the applicant has stated that the reserve in question will be the balance of the reserve remaining after the expiry of the term of a pension being paid in accordance with subregulation 1.06(6) of the SISR. 14. As at the time of the allocation the pension will have ended, this reserve cannot be considered a reserve being used solely to support the payment of a pension. Accordingly, none of the exceptions in paragraph 291-25.01(4)(b) of the ITAR 1997 apply. 15. Paragraph 291-25.01(4)(a) of the ITAR 1997 provides an exception where the amount is allocated in a fair and reasonable manner to an account for every member of the fund and the amount allocated is less than 5% of the value of the member’s interest in the fund at that time. 16. The applicant has stated that the trustee will be making the allocation from the reserve to the member in accordance with rule 14.4 of the Deed of Amendment. This rule states that the trustee may determine that the whole or part of a reserve can be paid to a member as a lump sum benefit. 17. The applicant has further stated that, at the time the trustee is intending to make the allocation, the member will no longer have an interest in the fund, and the allocation will be made directly to the member, and will not be made to an account for the member. 18. However the scheme of the SISR is that a trustee is only authorised to pay an amount from the fund to pay a member’s benefits or meet an expense of the fund. Rule 3.1 of the Deed of Amendment states the rules of the fund are subject to the Act (defined to include SISR and ITAA 1997) and that if there is any inconsistency between the provisions of the Act and the fund rules, the provisions of the Act shall prevail. 19. Accordingly, to comply with the payment standards in the SISR, the amount cannot be paid directly to the member from the reserve without being allocated to an account for the member in the first instance. 20. A lump sum benefit is a superannuation benefit. Essentially when the trustee makes an allocation from the reserve in accordance with rule 14.4, the trustee is creating an entitlement for the member to a superannuation lump sum. Therefore this entitlement is effectively the member’s superannuation interest in the fund, equal to the amount of the allocation. 21. Whilst the payment might be made directly to the member, this does not alter the fact that by making a determination in accordance with rule 14.4, the trustee has created an entitlement for the member to that amount, and thereby created a superannuation interest for the member – from which the superannuation lump sum is effectively paid. 22. The exception in paragraph 291-25.01(4)(a) of the ITAR 1997 requires the allocation to be less than 5% of the member’s interest in the fund. Immediately prior to the allocation, the member has no interest in the fund. Therefore the allocation will not meet the exception, and accordingly will be considered a concessional contribution in accordance with subsection 291-25(3) of the ITAA 1997. | Summary: When the trustee makes an allocation to an individual in accordance with this rule, the payment from the reserve to the member creates a member entitlement in the fund which is a superannuation interest, and the payment to the member will be a superannuation lump sum benefit. | Detailed Reasoning - Detailed reasoning: 23. Section 307-65 of the ITAA 1997 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. 24. Relevantly, item 1 in the table in subsection 307-5(1) of the ITAA 1997 includes as a superannuation benefit a payment to an individual from a superannuation fund because the individual is a fund member. 25. Rules 11.4 and 12.5 of the Deed of Amendment provides that the trustee may establish reserves and can add, deduct and allocate amounts to those reserves as it considers appropriate, except if such an action resulted in the fund becoming a non-complying superannuation fund. Rule 12.1 states that no member or any other person shall have any entitlement to any amount in a reserve. 26. Rule 14.4 of the Deed of Amendment states that the trustee of the fund may determine that the whole or any part of a reserve can be paid to the member as a lump sum benefit. 27. Accordingly, when the trustee makes such an allocation to an individual in accordance with this rule, the payment from the reserve to the member creates a member entitlement in the fund which is a superannuation interest, and the payment to the member will be a superannuation lump sum benefit made from that interest.