Private ruling: Composition of superannuation benefits
Published: August 2014
Ruling period: Year ended 30 June 2014.
Date scheme commenced: 1 July 2013.

Ruling: Q1: Does your superannuation interest contain a tax-free component? | A1: Yes.

Relevant facts and circumstances: You are over 60 years of age. You are a member of a self-managed superannuation Fund (the Fund). You commenced a pension during the 2000-01 income year. Upon commencement of the pension you provided the following relevant details and values details to the ATO: Eligible service period start date 1981-82 Undeducted contributions A Pre-1 July 1983 component B Post-30 June 1983 taxed element C Total benefit amount D Based on the above, the undeducted purchase price (UPP) of your pension at commencement date was $X (undeducted contributions plus the pre-1 July 1983 component). According to the member's statement for the year ended 30 June 2007, the balance of your superannuation interest was $Y. Your applicable service period as at 30 June 2007 was calculated to be: Pre-July 1983 service period (days) AB Post-July 1983 service period (days) BC Total eligible service period (days) ABC Based on the information provided in your income tax returns, you claimed a deduction for the deductible amount of the UPP of your pension for the 2000-01 to 2006-07 income years totaling $E. You have stated that you have not made any further contributions to the fund since commencing a pension.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 27A(1). | Income Tax Assessment Act 1997 Section 280-35. | Income Tax Assessment Act 1997 Section 301-15. | Income Tax Assessment Act 1997 Section 301-20. | Income Tax Assessment Act 1997 Subsection 301-20(1). | Income Tax Assessment Act 1997 Subsection 301-20(2). | Income Tax Assessment Act 1997 Subsection 301-20(4). | Income Tax Assessment Act 1997 Section 301-30. | Income Tax Assessment Act 1997 Subsection 301-35(1). | Income Tax Assessment Act 1997 Subsection 301-35(2). | Income Tax Assessment Act 1997 Section 306-5. | Income Tax Assessment Act 1997 Section 307-5. | Income Tax Assessment Act 1997 Section 307-120. | Income Tax Assessment Act 1997 Subsection 307-125(2). | Income Tax Assessment Act 1997 Section 307-210. | Income Tax Assessment Act 1997 Section 307-225. | Income Tax Assessment Act 1997 Section 307-345. | Income Tax Assessment Act 1997 Subsection 307-345(2).

Reasons for decision: Summary: The crystallised component of your superannuation interest as at 30 June 2007 was $F. As you do not have a contributions component, this amount represents your total tax-free component. Therefore the proportion of your total superannuation interest that represents the tax-free component is F%. As you were in receipt of a pension at 30 June 2007, the tax-free and taxable component proportions are fixed from that date. | Detailed Reasoning - Components of a superannuation interest: A superannuation interest is made up of two components: a tax-free component and a taxable component. Subdivision 307-D of the Income Tax Assessment Act 1997 (ITAA 1997) defines the various components of a superannuation interest. | Detailed Reasoning - Tax-free component: Section 307-210 of the ITAA 1997 states that the tax-free component consists of the contributions segment and the crystallised segment. The contributions segment consists of all contributions made after 30 June 2007 which have not been included in the assessable income of the superannuation fund. According to the facts you had commenced a pension on 1 July 2000 and did not make any contributions to the fund after this date. As such, your superannuation interest does not include a contributions segment. The crystallised segment of a superannuation interest is defined in section 307-225 of the ITAA 1997 as follows: (1) To work out the crystallised segment of a superannuation interest, first assume that: (a) an eligible termination payment had been made in respect of the holder of the interest just before 1 July 2007; and (b) the amount of the eligible termination payment had been equal to the value of the interest at that time. (2) The crystallised segment of the superannuation interest is so much of the value of the interest as consists of the total of the following components of the eligible termination payment: (a) the concessional component; (b) the post-June 1994 invalidity component; (c) the undeducted contributions; (d) the CGT exempt component; (e) the pre-July 83 component. Based on the above, the first step requires the fund to assume that an eligible termination payment (ETP) was made to you just before 1 July 2007 equal to the value of the superannuation interest at that time. According to the facts the value of your superannuation interest as at 30 June 2007 was $Y. As such, this represents the notional ETP. Based on the facts provided, this amount consists of an undeducted contributions component and a pre-July 1983 component. | Detailed Reasoning - Calculating the undeducted contributions component: The term 'undeducted contributions' is defined in subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Essentially undeducted contributions are contributions made to the superannuation fund, apart from employer contributions, for which no deduction has been claimed. In order to calculate the undeducted contributions component, we need to work backwards using the value of the undeducted purchase price (UPP) at the commencement date of your pension. According to the facts, the UPP of your superannuation interest at that time was $X. As you were in receipt of a pension at 30 June 2007, this figure is reduced by the deductions of $E claimed against the UPP from the commencement of your pension in the 2000-01 income year until the 'payment' of the notional ETP in the 2006-07 income year. This provides a residual UPP of $G ($X minus $E). Note however that the UPP is made up of the undeducted contributions component and the pre-July 83 component. As such the residual needs to be apportioned between the two components based on their relevant proportions at pension commencement date. At pension commencement date undeducted contributions represented H% ($A divided by $X) of the UPP. Accordingly, H% of the residual represents the undeducted contributions component as at 30 June 2007. This provides a residual undeducted contributions component of $I (H% multiplied by $G). | Detailed Reasoning - Calculating the pre-July 83 component: The amount of the pre-July 1983 component is the lesser amount determined by the formulae set out in subparagraphs 27AA(1)(d)(i) and (ii) of the ITAA 1936, these being: (i) (ETP - C - IC - NQ - EC - CGT) x (Pre-July 1983 days/ Total period) or (ii) ETP - C - IC - NQ - EC - CGT - UC Where: ETP is the gross amount ($Y); C is the concessional component amount ($nil); IC is the post-June 1984 invalidity component ($nil); NQ is any non-qualifying component amount ($nil); EC is the excessive component amount ($nil); CGT is the CGT exempt component amount ($nil); UC is the undeducted contributions ($I); Pre-July 1983 is the number of whole days in the eligible service period that occurred before 1 July 1983 (AB); and Total period is the number of whole days in the eligible service period (ABC days). • Pre-July 1983 calculation under formula subparagraph 27AA(1)(d)(i) : ($Y - $nil - $nil - $nil - $nil -$nil) x (AB / ABC) = $J • Pre-July 1983 calculation under formula subparagraph 27AA(1)(d)(ii) : $Y - $nil - $nil - $nil - $nil - $nil - $I = $K The pre-July 1983 component of $J (lesser amount) is confirmed. Based on the above analysis, the crystallised component of your superannuation interest is $F (undeducted contributions component plus the pre-July 1983 component). As you do not have a contributions component this amount represents your total tax-free component. Therefore as at 30 June 2007 the proportion of your total superannuation interest that represented the tax-free component was F% ($F divided by $Y). | Detailed Reasoning - Taxable component: The taxable component of your superannuation interest is the total value of the interest at 30 June 2007, less the value of the tax-free amount. As such, your taxable component is $L ($Y minus $F). Therefore the proportion of your total superannuation interest that represents the taxable component is M% ($L divided by $Y). The taxable component of a superannuation interest can consist of an element taxed in the fund and/or an element untaxed in the fund. In your case, the taxable component consists wholly of a post-30 June 1983 taxed element. | Detailed Reasoning - Further issues for you to consider: The tax-free and taxable component proportions detailed above are calculated as at 30 June 2007. As you were in receipt of a pension at 30 June 2007, the proportions are fixed from that date. Any earnings (or losses) accumulated in the superannuation fund are allocated to the tax-free and taxable components based on the proportions calculated above. As you are over 60, the tax-free and taxable component proportions are irrelevant as your entire pension is non-assessable and non-exempt income and therefore tax-free. However, where death benefits are distributed to non-dependant beneficiaries as a lump sum, only the tax free portion (F%) of the superannuation benefits will be tax-free in the hands of the beneficiaries. The remainder, being the taxed element of the taxable component (M%), will be subject to tax in the hands of the non-dependant beneficiaries at 15%.