Private ruling: Interests in Public Sector Superannuation Scheme
Published: April 2014
Ruling period: 1 July 2007 to 30 June 2013
Date scheme commenced: 1 July 2007

Ruling: Q1: Should benefits sourced partly from a contributory scheme and partly from a non-contributory scheme be treated as separate superannuation interests for the purpose of section 307-200 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Where a process is in place to value a superannuation interest and this methodology has continued after 28 June 2007, is this methodology appropriate to value an interest under regulation 307-205.02B of the Income Tax Assessment Regulations 1997 (ITAR 1997) for the purposes of the proportioning rule in section 307-125 of the ITAA 1997? | A2: Yes | Q3: In valuing a superannuation interest and the tax free and taxable components of that interest, is it appropriate: (i) to apply paragraph 307-125(3)(b) of the ITAA 1997 if the member has elected to commute their right to a pension benefit for a right to a lump sum benefit, where the election is made at a time before the date of entitlement to the pension benefit but with effect from that date; and (ii) to apply paragraph 307-125(3)(c) of the ITAA 1997 if the member has elected to commute their right to a pension benefit to a right to a lump sum benefit but with effect from a date after the entitlement to the pension arises? | A3: Yes

Relevant facts and circumstances: The scheme is a public sector superannuation scheme. 1. When a member is due a benefit, it is sourced partly from a contributory scheme and partly from a non-contributory scheme, but paid out of a single fund of assets. 2. The scheme provides a defined benefit pension which the member can elect to commute in full or in part to a lump sum. The pension is payable with effect from the day after the member's retirement date or last day of service. 3. If the member makes the commutation election before the member's retirement date, to take effect from the retirement date, the member's entitlement to a pension benefit is replaced with an entitlement to a lump sum benefit effective from the retirement date. The only payment a member will receive is the lump sum as no instalment or pro-rata instalment of fortnightly pension is payable. 4. If the member makes the commutation election after the member's retirement date, the member receives one or more instalments or pro-rata instalments of fortnightly pension in addition to the lump sum payment on commutation of the pension.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 307-125 | Income Tax Assessment Act 1997 paragraph 307-125(3)(b) | Income Tax Assessment Act 1997 paragraph 307-125(3)(c) | Income Tax Assessment Act 1997 section 307-200 | Income Tax Assessment Regulations 1997 subregulation 307-200.03(2) | Income Tax Assessment Regulations 1997 regulation 307-205.02B

Reasons for decision: Summary: Yes, benefits sourced partly from a contributory scheme and partly from a non-contributory scheme are to be treated as separate superannuation interests for the purpose of section 307-200 of the ITAA 1997? | Detailed Reasoning - Reason for decision: The scheme is a public sector superannuation scheme. Subregulation 307-200.03(2) of the ITAR 1997 explains how to treat interests in a public sector superannuation scheme, stating: (2) The interest is to be treated as 2 interests if: (a) the superannuation benefit that is to be paid from the scheme is sourced: (i) partly from contributions made into the scheme or earnings on those contributions; and (ii) partly from 1 or more other sources; or (b) the superannuation benefits that are to be paid from the scheme are sourced: (i) partly from contributions made into the scheme or earnings on those contributions; and (ii) partly from 1 or more other sources. Accordingly, since benefits to be paid to members are sourced partly from a contributory scheme and partly from a non-contributory scheme, they are to be treated as two separate interests. | Detailed Reasoning - Question 2: Where a process is in place to value a superannuation interest and this methodology has continued after 28 June 2007, is this methodology appropriate to value an interest under regulation 307-205.02B of the ITAR 1997 for the purposes of the proportioning rule in section 307-125 of the ITAA 1997? | Summary: Yes, where a process is in place to value a superannuation interest and this methodology has continued after 28 June 2007, is this methodology appropriate to value an interest under regulation 307-205.02B of the ITAR 1997 for the purposes of the proportioning rule in section 307-125 of the ITAA 1997? | Detailed Reasoning - Reason for decision: The scheme is a public sector superannuation scheme. In accordance with regulation 307-205.02B of the ITAR 1997: A superannuation interest in a public sector superannuation scheme is to be valued: (a) by using the practice for valuing a superannuation interest (other than the one supporting a superannuation income stream mentioned in subparagraph 307-205.02(1)(a)(i)) that was used by the scheme immediately before 28 June 2007; or (b) if there was no practice for valuing an interest at that time - by using the method specified in subregulation 307-205.02(2). Therefore, if there was a practice in place for valuing superannuation interests before 28 June 2007, that practice is to be used by the scheme to value a superannuation interest post 28 June 2007. | Detailed Reasoning - Question 3: In valuing a superannuation interest and the tax free and taxable components of that interest, is it appropriate: (i) to apply paragraph 307-125(3)(b) of the ITAA 1997 if the member has elected to commute their right to a pension benefit for a right to a lump sum benefit, where the election is made at a time before the date of entitlement to the pension benefit but with effect from that date; and (ii) to apply paragraph 307-125(3)(c) of the ITAA 1997 if the member has elected to commute their right to a pension benefit to a right to a lump sum benefit but with effect from a date after the entitlement to the pension arises? | Summary: Yes, it is appropriate for the fund to apply paragraph 307-125(3)(b) of the ITAA 1997 if the member has elected to commute their right to a pension benefit for a right to a lump sum benefit, before the entitlement to the pension has arisen and, to apply paragraph 307-125(3)(c) of the ITAA 1997 if the member has elected to commute their pension benefit to a lump sum benefit, after the entitlement to the pension has arisen. | Detailed Reasoning - Reason for decision: Subsection 307-125(3) of the ITAA 1997 states that the value of the superannuation interest, and the amount of the tax free component and taxable component, is determined at whichever of the following times is applicable: (a) if the *superannuation benefit is a *superannuation income stream benefit - when the relevant *superannuation income stream commenced; (b) if the superannuation benefit is a *superannuation lump sum - just before the benefit is paid; (c) despite paragraphs (a) and (b), if the superannuation benefit arises from the commutation of a superannuation income stream - when the relevant *superannuation income stream commenced. Therefore, if the member has elected to commute their right to a pension benefit for a right to a lump sum benefit, before the entitlement to the pension has arisen, paragraph 307-125(3)(b) of the ITAA applies. Alternatively, if the member has elected to commute their pension benefit to a lump sum benefit, after the entitlement to the pension has arisen, paragraph 307-125(3)(c) of the ITAA 1997 will apply.

Question 1: Should benefits sourced partly from a contributory scheme and partly from a non-contributory scheme be treated as separate superannuation interests for the purpose of section 307-200 of the ITAA 1997?