Private ruling: Allocation from a reserve
Date of advice: 27 May 2016
Published: July 2016

Ruling: Q1: Will an amount be counted against a member's concessional contribution cap, per subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997), where there is a full commutation of the member's lifetime pension and the total capital that was backing that pension is used immediately to commence an account based pension for the member? Advice No

Relevant facts and circumstances: The applicant is a complying self-managed superannuation fund (the Fund). During the 2004-05 income year, the trustee of the Fund (the Trustee) commenced paying to a particular member of the fund (the Member) a lifetime pension that meets the rules in subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) (the Pension). The Pension is supported by a Pension account and a Pension reserve account. The Member wishes to commute the Pension and use the total of the amount standing against the Pension account and the amount standing against the Pension reserve account to immediately commence an account based pension that meets the rules under subregulation 1.06(9A) of the SISR. The maximum commutable amount of the Pension has been calculated in accordance with paragraph 1.06(6)(g) of the SISR. The value of the assets supporting the Pension exceeds the maximum commutable amount. The Pension reserve account has been used solely to enable the Fund to discharge its liabilities in respect of the Pension.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 291-25 | Income Tax Assessment Regulations 1997 Regulation 292-25.01 | Income Tax Assessment Regulations 1997 Subregulation 292-25.01(4) | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06 | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.07B

Reasons for decision: Summary: If, in the payment year in which the commutation is to take place, the Trustee has paid at least the minimum pension amount as calculated under subregulation 1.07B(4) of the SISR, and on the commutation of Pension, the total commutation amount (comprising the amount standing to the credit of the Pension account and the Pension reserve account) is allocated to the Member for the payment of an account based pension as soon as practicable, the amount so allocated would not be a concessional contribution as defined in section 291-25 of the ITAA 1997. | 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) of the ITAA 1997 and each amount covered under subsection 291-25(3) of the ITAA 1997. According to subsection 291-25(2) of the ITAA 1997, the concessional contributions of an individual are those contributions that are: • paid to a superannuation fund for the benefit of that individual; and • included in the fund's assessable income. Subsection 291-25(3) of the ITAA 1997 provides that concessional contributions for an income year also include certain amounts allocated for the individual in accordance with conditions specified in the regulations. The relevant regulation is regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997). Relevantly, 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: (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; … | Detailed Reasoning - Meaning of 'reserve': There is no definition of 'reserve' in either the ITAA 1997 or the ITAR 1997. In ATO ID 2015/21 Superannuation ECT: concessional contributions - reserve and ATO ID 2015/22 Superannuation ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension' (ATO ID 2015/22) the Commissioner concluded that 'reserve' as used in regulation 292-25.01 of the ITAR 1997 has a broad meaning and 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 ATO ID 2015/22, the Commissioner considered the restructure of a defined benefit pension, being a complying lifetime pension under subregulation 1.06(2) of the SISR, and took the view that even though there were two separate accounts (the complying lifetime pension account and the pension reserve account) these two accounts together represent a reserve. This is because the two accounts together 'comprise an amount that is available to the trustee, not to the member, to satisfy the trustee's liability to pay the complying lifetime pension.' In the current case, it is stated that the pension that is being paid to the Member is a pension that meets the rules in subregulation 1.06(6) of the SISR. However, the reasoning which applied to ATO ID 2015/22 can similarly be applied to the current case. In the current case, the Pension account and the Pension reserve account together comprise an amount that is available to the Trustee, and not the Member, to satisfy the Trustee's liability to pay the Pension. In other words, the Pension account and the Pension reserve account together represent a reserve for the purposes of subregulation 292-25.01(4) of the ITAR 1997. However, if an amount allocated from a reserve is not to be treated as a concessional contribution by reason of paragraph 292-25.01(4)(b) of the ITAR 1997, subparagraph 292-25.01(4)(b)(i) of the ITAR 1997 requires the reserve to be: …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. According to the facts outlined in the application, neither the Pension account nor the Pension reserve account has been used for any purpose other than to pay the Pension to the Member. | Detailed Reasoning - Commutation of an income stream: If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of paragraph 292-25.01(4)(b) of the ITAR 1997, one of the sub-subparagraphs of subparagraph 292-25.01(4)(b)(ii) of the ITAR 1997 must also be met. In this case sub-subparagraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997 is relevant and requires that 'on the commutation of the income stream ... the amount is allocated to the recipient of the income stream, to commence another income stream, as soon as practicable'. In accordance with subregulation 1.07B(3) of the SISR, a pension that meets the standards of subregulation 1.06(6) of the SISR cannot be commuted unless: (a) the commutation results from the death of an annuitant or pensioner or a reversionary annuitant or reversionary pensioner; or (b) the sole purpose of the commutation is: (i) to pay a superannuation contributions surcharge; or (ii) to give effect to an entitlement of a non-member spouse under a payment split; or (iii) to meet the rights of a client to return a financial product under Division 5 of Part 7.9 of the Corporations Act 2001 ; or (c) the annuity or pension has paid, in the payment year in which the commutation is to take place, at least the minimum amount under subregulation (4). For the purposes of paragraph 1.07B(3)(c) of the SISR, 'payment year' means the period of 12 months that begins on the day after (subregulation 1.07B(2) of the SISR): (a) commencement day; or (b) the anniversary of the commencement day. | Detailed Reasoning - Applying the paragraph 292-25.01(4)(b) exception: If the Pension is commuted, the total commutation amount comprising the amount standing to the credit of the Pension account and the Pension reserve account together represent a reserve used solely for the purpose of enabling the Trustee to guarantee the pension payments for the term of the Pension. Therefore, if in the payment year in which the commutation is to take place, the Trustee has paid at least the minimum amount as calculated under subregulation 1.07B(4) of the SISR, and on the commutation of Pension, the total commutation amount (comprising the amount standing to the credit of the Pension account and the Pension reserve account) is allocated to the Member for the payment of an account based pension as soon as practicable, the amount so allocated would not be a concessional contribution as defined in section 291-25 of the ITAA 1997. The fact that the amount allocated in this case exceeds the maximum commutable amount does not affect the reasoning outlined above.

This advice applies for the following period: Income year ending 30 June 2016