Private ruling: Concessional contributions
Date of advice: 26 February 2018
Published: June 2018
Ruling period: Income year ending 30 June 20XX | The arrangement commences on: | 1 July 20XX

Ruling: Q1: 1. Following the commutation of two Flexi Lifetime pensions (the Life Pensions) paid to a person (the Member), will any part of the total capital backing the Life Pensions (being the maximum commutation value of the pensions plus the amount in the pension reserve) count as the Member’s concessional contribution under subsection 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997) if that amount is used to immediately commence an account based pension for the Member? | A1: Yes | Q2: 2. Following the commutation of the Member’s Flexi Term pension (the Term Pension), will any part of the total capital backing the Term Pension (being the maximum commutation value of the pension plus the amount in the pension reserve) count as the Member’s concessional contribution under subsection 291-25(3) of the ITAA 1997 if that amount is used to immediately commence an account based pension for the Member? | A2: Decline to Rule

Relevant facts and circumstances: The Member is the sole member of a complying self-managed superannuation fund (the Fund). The Member is over 65 years of age. As at 30 November 20XX, the Member received X account based pensions and Y Flexi pensions from the Fund. Flexi A and Flexi B are reversionary income streams that meet the requirements of subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Flexi 3 is the Member’s own income stream which meets the requirements in subregulation 1.06(6) of the SISR. All Y Flexi pensions may have some level of monies that form part of the fund reserves (i.e. surplus assets over fund liabilities) which will need to be determined by an Actuary. The Member intends to commute the Y Flexi pensions and use the capital value of these income streams to commence account based pensions. The exact amount to be commuted will need to be determined by an Actuary. Any monies that form part of the Fund’s reserves associated with the Flexi pensions will be allocated to the Member’s interest in accordance with subregulation 291-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR 1997). The pension reserve has been used solely to support the Flexi pensions. In order to make a ruling on the issue raised in Question 2 of your application, we requested the following information from you: ● With respect to Flexi 3 – details of the original terms of the pension, specifically the terms under which the residual capital value (RCV) of the pension is payable. ● Confirmation whether any of the relevant pensions have been commuted since the application for a private ruling was made. Subsequently you advised that: ● You have given us all the information you have; and ● Nothing has been done – the client is awaiting the ATO response.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 291-25(1) | Income Tax Assessment Act 1997 Subsection 291-25(2) | Income Tax Assessment Act 1997 Subsection 291-25(3) | Income Tax Assessment Regulations 1997 Subregulation 291-25.01 | Income Tax Assessment Regulations 1997 Paragraph 291-25.01(4)(b) | Taxation Administration Act 1997 Subsection 359-5(1) | Taxation Administration Act 1997 Subsection 357-105(1) | Taxation Administration Act 1997 Subsection 357-105(2) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(6) | Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(6)(g) | Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

Reasons for decision: Summary: In accordance with paragraph 1.06(6)(g) of the SISR, the lump sum available on commutation of Flexi A and Flexi B is limited to the amount calculated using the pension valuation factors (PVFs) in Schedule 1B of the SISR (the maximum commutation value). If the amount equal to the maximum commutation value of Flexi A and Flexi B is used to commence an account based pension as soon as practicable, it will not count as the Member’s concessional contribution under subsection 291-25(3) of the ITAA 1997. Following the commutation of Flexi A and Flexi B, these pensions will cease, and the balance of the relevant reserve account which is in excess of the maximum commutation value of the pensions ceases to be a pension reserve being used solely for the purpose of enabling the trustee of the Fund to discharge all or part of its liabilities as soon as they become due in respect of these pensions. As the reserve from which any additional allocations are to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the ITAR 1997, if the balance of the reserve account is allocated to the Member to commence account based pensions, the amount of the allocation will be the Member’s concessional contribution in accordance with subsection 291-25(3) of the ITAA 1997. | Detailed Reasoning - Question 1 - 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. Subsection 291-25 (3) of the ITAA 1997 provides that concessional contributions for a financial year include certain amounts allocated for the individual in accordance with conditions specified in the regulations. The relevant regulation is regulation 291-25.01 of the ITAR 1997. Subregulation 291-25.01(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 certain exclusions apply. Relevantly, paragraph 291-25.01(4)(b) of the ITAR 1997 excludes an amount that is allocated from a reserve if: (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 Interpretative Decision ATO ID 2015/21 Superannuation ECT: concessional contributions – reserve (ATO ID 2015/21), the Commissioner concluded that 'reserve' for the purposes of subregulation 292-25.01(4) 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.(Note that subregulation 292.25-01 was renumbered to 291.25-01 with effect from March 2017). When the Member commenced Flexi A & Flexi B, they essentially exchanged an amount of capital for a right to receive an income stream, and a right for a certain amount to be returned to them in the event the pensions are commuted. The amount that the Member exchanged for these rights became an amount that is available to the trustee of the Fund, not the Member, to satisfy the trustee's liability to pay the pensions. Therefore, the maximum commutation value of Flexi A and Flexi B plus the amount in the pension reserve represent a ‘reserve’ for the purposes of regulation 291-25.01 of the ITAA 1997. | Detailed Reasoning - Commutation of the income streams: If an amount allocated from a reserve is not to be treated as a concessional contribution by reason of subregulation 291-25.01(4) of the ITAR 1997, one of the exceptions in the subregulation must be met. Paragraph 291-25.01(4)(b) of the ITAR 1997 refers to amounts being allocated from a reserve used solely for the purpose of enabling a fund to discharge its liabilities in respect of income stream benefits. In this case, the pension reserve created when the member commenced the pensions has been used solely to support the payment of these pensions. Sub-subparagraph 291-25.01(4)(b)(ii)(B) of the ITAR 1997 provides an exception to an amount being considered a concessional contribution where an amount is allocated from a reserve supporting the payment of an income stream where '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 regard to the commutation of Flexi A and Flexi B, subparagraph 1.06(6)(g) of the SISR states: if, under the rules, the pension can be commuted - except if conversion is in relation to a commutation to pay a superannuation contributions surcharge, the conversion to a lump sum is limited to a sum that is not greater than the sum determined by applying the appropriate pension valuation factor under Schedule 1B to the pension as if the commencement day were the day on which the commutation occurs. Accordingly, an amount of a pension reserve (maintained to support the payment of a pension that meets the requirements under subregulation 1.06(6) of the SISR) that exceeds the maximum commutation amount of the pension cannot form part of the commutation lump sum. In this case, on the commutation of Flexi A and Flexi B, the commutation amount of each pension, calculated by the Fund actuary, will be allocated to the member to commence an account based pension. This commutation amount is limited in accordance with paragraph 1.06(6)(g) of the SISR. Whilst it is expected that there will be an amount remaining in the reserve following the commutation of the flexi pensions, the pensions will cease at the time of commutation, and consequently, the reserve will no longer be a reserve being used solely to enable the Fund to discharge its liabilities in respect of the payment of those pensions. As it is our contention that following the commutation, the reserve from which any additional allocation is to be made is not a reserve which meets the requirements of paragraph 291-25.01(4)(b) of the ITAR 1997, the exception in that provision will not apply. Therefore, on the commutation of Flexi A and Flexi B , an amount that is equal to the maximum commutation value of the pensions will not count as the Member’s concessional contribution if that amount is used to commence an account based pension as soon as practicable. However, the amount in the pension reserve which is in excess of the maximum commutation value of the pensions, will count as the Member’s concessional contribution if that amount is allocated to the Member to immediately commence an account based pension for the Member. | Summary: The Commissioner has declined to make your private ruling because you have not provided all the information required to make the ruling, specifically information in relation to the terms and conditions relating to the payment of the Flexi Term pension, including the circumstances in which the RCV is payable. | Detailed Reasoning - Question 2: In accordance with subsection 359-5(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA), the Commissioner may, on application, make a written ruling (called a private ruling) on how the Commissioner considers a relevant provision applies, or would apply, to a particular taxpayer in relation to a specified scheme, arrangement or transaction. Under subsection 357-105(1) of Schedule 1 to the TAA, if the Commissioner considers that further information is required to make a private ruling, the Commissioner must request the applicant to give that information to the Commissioner. Subsection 357-105 (2) of Schedule 1 to the TAA states that, if the applicant does not give the requested information to the Commissioner within a reasonable time, the Commissioner may decline to make a private ruling. In this case, you could not provide all the information required for the Commissioner to make your ruling. Therefore, we decline to make the ruling because we do not have all the information we require to make the ruling.