Private ruling: Superannuation income stream tax offset
Published: August 2013
Ruling period: 2012-13 income year.
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the taxable component of a standard indexed pension paid to a member of a public sector superannuation scheme include an element taxed in the fund when the employer component of a transfer value originating in a taxed fund is paid to the Commonwealth? | A1: Yes. | Q2: Are you entitled to a tax offset for the relevant income year in respect of the taxable component of the standard indexed pension paid from the public sector superannuation scheme? | A2: Yes.

Relevant facts and circumstances: In a letter in the third quarter of the relevant income year, the public sector superannuation scheme (the Scheme) advised you that a roll-over amount has been accepted from your private sector superannuation scheme the final quarter of 200X income year and that this roll-over amount has been treated as a 'transfer value'. The total transfer value paid into the Scheme consists of the following components: · employer component · notional productivity amount · employee contribution The employer component was paid into Consolidated Revenue and effectively purchased a credit for an additional period of contributory service. The notional productivity amount was added to your productivity benefit and paid into an accumulated benefit fund. The remaining amount was treated as employee contribution and also paid into a taxed public sector superannuation fund. You are under 60 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 307-200(1) | Income Tax Assessment Act 1997 Subsection 307-200 (3) | Income Tax Assessment Act 1997 Paragraph 307-125(3)(a) | Income Tax Assessment Act 1997 Section 301-25 | Income Tax Assessment Act 1997 Section 301-25(2) | Income Tax Assessment Act 1997 Section 301-100(2) | Income Tax Assessment Act 1997 Subsection 301-105(2) | Income Tax Assessment Act 1997 Section 301-110 | Income Tax Assessment Act 1997 Section 307-295 | Taxation Administration Act 1953 Schedule 1, Paragraph 357-110(1)(a) | Income Tax Assessment Regulations 1997 Regulation 307-200.03 | Income Tax Assessment Regulations 1997 Subregulation 307-200.03(2) | Income Tax Assessment Regulations 1997 Sub-subregulation 307-200.03(2)(a) | Income Tax Assessment Regulations 1997 Regulation 307-200.03 | Income Tax Assessment Regulations 1997 Regulation 307-205.02B | Income Tax Assessment Regulations 1997 Subregulation 307-205.02(2)

Reasons for decision: Summary: Once you commence to receive a pension from the Scheme the following will apply: · Up until you reach age 60 you will be entitled to a 15% tax-offset on that part of the taxable component of the pension which is attributable to the taxed element of the superannuation interest sourced from other taxed superannuation funds. The remainder of the taxable component of the pension will not be eligible for a tax-offset. · After you reach age 60 that part of the pension sourced from the contributions made into the Scheme that originated from other taxed superannuation funds will not be included in your assessable income. However, the remainder of the taxable component of the pension will be included in your assessable income and you will be entitled to a 10% tax-offset in respect of that remaining amount. | Detailed Reasoning - The Scheme: The Scheme is what is known as a hybrid superannuation scheme. That is, it's a combination of two types of funds, a defined benefit fund and an accumulation fund. In a defined benefit fund, member benefits are 'defined' by a formula. In the Scheme, the defined benefit part is generally an indexed pension which is defined by a formula based on the member's final super salary, length of contributory service and age at exit (this is known as the 'employer-financed component'). In the case of the Scheme, the defined benefit part does not accrue in a superannuation fund. Rather, it is paid out of Commonwealth consolidated revenue. Because of this, the defined benefit part has not been subject to the 15% tax payable by most superannuation funds and is referred to as the 'element untaxed in the fund' or, more simply, the 'untaxed element'. In an accumulation fund, member benefits are determined by the value of contributions and investment returns. The accumulation part is the member's contributions plus fund earnings (known as the 'member component') and the employer's fortnightly contributions to superannuation (known as the 'productivity component'). Unlike the defined benefit part, the accumulation part accrues in a superannuation fund - the public sector superannuation fund. Consequently, the accumulation part has been subject to the 15% tax payable by most superannuation funds and is referred to as the 'taxed element'. | Detailed Reasoning - Taxable component of an indexed pension: Subsection 307-200(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that regulations may specify that a superannuation interest can be treated as two or more superannuation interests in certain circumstances. Subsection 307-200(3) of the ITAA 1997 provides that the regulations may also specify a way of treating a superannuation interest in relation to the element taxed in the fund and the element untaxed in the fund. Regulation 307-200.03 of the Income Tax Assessment Regulations 1997 (ITAR 1997) deals with the circumstances in which an interest in a public sector superannuation scheme is to be treated as two or more superannuation interests. Under subsection 995-1(1) of the ITAA 1997, a 'public sector superannuation scheme' has the same meaning as in the Superannuation Industry (Supervision) Act 1993 (SISA). Under subsection 10(1) of the SISA, a 'public sector superannuation scheme' includes a scheme for the payment of superannuation, retirement or death benefits established under the law of the Commonwealth or of a State or Territory. The Scheme is established under an Act, being a law of the Commonwealth. Sub-subregulation 307-200.03(2)(a) of the ITAR 1997 provides that if the superannuation benefit to be paid is sourced partly from contributions made into a public sector superannuation scheme or earnings on those contributions and partly from one or more other sources it is to be treated as two superannuation interests. In this case, the indexed pension payable to you is sourced partly: · from contributions made into the Scheme that originated from other taxed superannuation funds and converted into a credit of additional contributory service; and · from the Commonwealth. Therefore, subregulation 307-200.03(2) of the ITAR 1997 requires that the interest supporting the indexed pension payable to you be treated as two separate interests. Under subregulation 307-200.03(3) of the ITAR 1997, the two separate interests consist of: · a 'contributions' interest consisting of contributions made into the Scheme that were converted to a credit of additional contributory service (i.e. the employer component); and · a 'remainder' interest consisting of the remainder of the amount sourced from the Scheme. The Commissioner considers that if the origin of part of an indexed pension is contributions to the scheme from accruals in other taxed superannuation funds, then that part of the pension should be treated as sourced from those contributions. Subsection 307-295(2) of the ITAA 1997 provides that if a superannuation benefit is not sourced, to any extent, from contributions made into a superannuation fund or earnings on such contributions, the benefit will consist wholly of an element untaxed in the fund. In this case, a superannuation income stream will be sourced in part from contributions made into a taxed superannuation fund therefore the benefit will consist of both an element untaxed in the fund and an element taxed in the fund. | Detailed Reasoning - Taxation of pension or income stream up to age 60: Once you commence to receive a pension from the Scheme, indexed pension payments will need to be included in your assessable income and taxed at marginal rates plus Medicare Levy, under section 301-110 of the ITAA 1997, as they comprise entirely of the element untaxed in the fund. Ordinarily, the indexed pension is not eligible for any tax offsets as it consists entirely of an element untaxed in the fund. However, in your case, you will be entitled to a 15% tax-offset on that part of the taxable component which comes from the taxed element of an interest sourced from other taxed superannuation funds in accordance with subsection 301-25(2) of the ITAA 1997. The Scheme will advise you of the amount that is eligible for the 15% tax offset. | Detailed Reasoning - Taxation of pension or income stream from age 60: Once you reach age 60, you will be entitled to a tax offset of 10% in respect of pension payments received after your 60 th birthday under subsection 301-100(2) of the ITAA 1997. However, that part of the pension sourced from the contributions made into the Scheme that originated from other taxed superannuation funds and converted into a credit of additional contributory service will, from your 60 th birthday onwards, no longer need to be included in your assessable income.