Private ruling: Concessional contributions
Date of advice: 28 November 2018
Published: March 2019

Ruling: Q1: Will any part of an amount that is paid to a person as a superannuation lump sum benefit directly from a reserve be treated as a concessional contribution as defined in subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? Advice Yes

Relevant facts and circumstances: The Fund is a self managed superannuation fund within the meaning of section 17A of the Superannuation Industry Supervision Act 1993(SISA) The Fund is a complying self managed superannuation fund within the meaning of section 45 of SISA The Fund has a sole member (Member) who is currently aged over 65 The Member of the Fund commenced a superannuation income stream (Pension) early 2004 with the following features; a) The Pension complies with regulation 1.06(7) of the Superannuation Industry (Supervision ) Regulations 1994 (SISR) b) The Pension is payable to the member of for a term of 15 years and the term will expire in January 2019. c) The Pension payments are indexed annually at the discretion of the Trustee of the Fund ( up to 5% of CPI + 1%) and d) The Pension does not have a reversionary pensioner. Aside from the Pension the Member has no entitlements in the Fund and does not hold a Member’s account nor a Member’s Accumulation Account in the Fund. Once the remainder of the Pension amount payable for the period in ending January 2019 is paid the Trustee of the fund will: a) No longer hold any liabilities in relation to the Pension; however b) It will hold leftover capital that formerly supported the Pension liabilities. This leftover capital will constitute Reserves for the purposes of regulation 1.03(1) of the SISR and section 115 of the SISA The trustee intends to wind up the Fund once the remainder of the Pension amount payable for the period ending January 2019 is paid. At that time, the Trustee intends paying a superannuation lump sum benefit to the Member directly from the Reserve. In accordance with the governing rules of the Fund, the Trustee can pay a lump sum benefit directly from the reserve to a member if certain criteria are met. You contend that any lump sum benefits paid to the Member directly from the reserve will not create a Member Account nor a Member’s Accumulation Account within the Fund. The amount of the lump sum benefit would be the balance of the reserve at the time the Fund is wound up. The governing rules (the Rules) of the Fund allows the Trustee to establish a Reserve and, as outlined above, a Reserve will be established once the remainder of the Pension amount payable for the period ending January 2019 is paid. The trustee has resolved that, once established, the purpose of the Reserve is to provide superannuation lump sum benefits to Members ( or former Members) who have satisfied a condition of release with a nil cashing restriction (per Schedule 1A of the SISR),for example, reaching age 65. The Rules provide that a Member may be entitled to receive one or more of a lump sum benefit provided that any such benefit would not result in the Fund becoming a Non-Complying SMSF or would be in breach of the SIS Act or the Rules The Member of the Fund has attained age 65 and has therefore satisfied a condition of release with a nil cashing restriction (per Schedule 1A of the SISR). The payment of a lump sum benefit to the Member would therefore not be in breach of the Act. The Rules relating to the payment of a lump sum benefit from the Fund allow the trustee to pay the member a lump sum benefit provided it does not exceed the balance of the Member’s Accumulation Account and to also pay an amount to the Member from a reserve. The Rules allow the Trustee to make this payment to the member directly from the Reserve. You contend that in this lump sum benefit payment that the Trustee intends to make to the Member directly from the reserve will not be an amount “in a “complying superannuation plan. Consequently, it is your view section 291-25(3) of the ITAA 1997 would not apply to the lump sum benefit payment made to the Member, and therefore would not count towards the Member’s concessional contributions cap. You further contend that a similar view was found in the Commissioner in ATO ID 2015/21 (and former ATO ID 2013/12). In this determination: ● While amounts allocated from the Reserve to a member’s account within the fund were found to be allocations from a Reserve for the purposes of regulation 292-25.01(4) of the ITAR 1997 – and therefore did not count towards the member’s concessional cap. ● Benefit payments to the member directly from the Reserve that had no effect on the members account, that were in accordance with the governing rules of the superannuation fund, were not found to be allocations from a Reserve for the purposes of regulation 292-25.01(4) of the ITAR 1997 – and therefore did not count towards the member’s concessional contributions cap.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 291-25 (3) | Income Tax Assessment Regulations 1997 Subregulation 291-25.01(4) | Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(a)(i) | Income Tax Assessment Regulations 1997 Subregulation 291-25.(4)(a) | Income Tax Assessment Regulations 1997 Paragraph 291-25.01 (4)(b) | Income Tax Assessment Act 1997 Subsection 307-5(1) | Income Tax Assessment Act 1997 Section 307-65 | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(7)

Reasons for decision: Summary: The lump sum payment that the trustee intends to make directly to the member from the reserve will be an amount that is covered by subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997). The payment is a superannuation lump sum benefit | Detailed Reasoning - Lump sum payment from the reserve: 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. 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. In this case, you have 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(7) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). 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. 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. You have stated that the trustee will be making the allocation from the reserve to the member in accordance with rule 45.3 of the trust deed. 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. You have 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. 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 58 of the fund trust deed 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. 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. A lump sum benefit is a superannuation benefit. Essentially when the trustee makes an allocation from the reserve in accordance with rule 45.3, 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. 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 45.3, 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. 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. | Detailed Reasoning - Is the amount a superannuation lump sum benefit?: Section 307-65 of the ITAA 1997 defines a superannuation lump sum as a superannuation benefit that is not a superannuation income stream benefit. 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. Rule 35.1 of the fund 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 35.3 states that no member or any other person shall have any entitlement to any amount in a reserve. Rule 45.3 of the fund’s trust deed 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. 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. | Detailed Reasoning - Applicant of ATO ID 2015/21: You have argued that ATO ID 2015/21 concludes that benefit payments to members from a reserve made in accordance with the trust deed, and which do not affect a member’s account, were not allocations from a reserve for the purposes of the concessional contribution rules. ● However the benefit payments referred to in that ATO ID were temporary disability benefits which are specifically excluded from being superannuation benefits by paragraph 307-10(a) of the ITAA 1997. ● In this case, the trustee is making a superannuation lump sum benefit which is a superannuation benefit. Superannuation benefits can only be made from a superannuation interest.

This advice applies for the following periods: Income year ending 30 June 2019