Private ruling: Concessional contributions
Date of advice: 19 June 2017
Published: October 2017
Ruling period: Income year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: A1: 1. No. 2. Yes.

Relevant facts and circumstances: The fund is a single member self-managed superannuation fund (The Fund). The Trustee of The Fund is a corporate trustee. In the 2003-04 income year, the member commenced X flexi pensions, in accordance with the rules of The Fund. The flexi pensions at all times satisfied the requirements of subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). On 30 June 20XX the member requested the cessation of all flexi pensions that commenced to be paid from the Fund in the 2003-04 income year. On 30 June 20XX the Trustee of the Fund agreed to terminate all flexi pensions that commenced to be paid from the Fund in the 2003-04 income year, with effect from 30 June 20XX. On 30 June 20XX the member commuted the flexi pensions in accordance with the terms of the Fund’s Trust Deed and the SISR. Minutes of meeting of the Trustee of the Fund and letters from the Trustee of the Fund to the member on 30 June 20XX, state that as a result of the commutation of the respective flexi pension, that pension ceased. The commutation value of the flexi pensions was determined by the Fund’s actuary and allocated to the member on 30 June 20XX. The commutation amount of each pension was used by the member to commence a number of account based pensions on 30 June 20XX. The Fund’s Trust Deed provides for the payment of an account based pension to the member, subject to the standards under the SISR being satisfied. The Fund’s Trust Deed allows for a reserve. For the 20XX, 20YY and 20ZZ income years, 4.99% of the Member’s interest in The Fund has been allocated from the pension reserve to the Member account and used to commence account based pensions. The Trustee of the Fund proposes to allocate the pension reserve balance to the member to commence an account based pension payable to the member by 30 June 20ZZ, which will comply with the Fund’s Trust Deed and regulation 1.06(9A) of SISR.

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 292-25.01(4) | Income Tax Assessment Regulations 1997 Paragraph 292-25.01(4)(a) | Income Tax Assessment Regulations 1997 Paragraph 292-25.01(4)(b) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(2) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(6) | Superannuation Industry (Supervision) Regulations 1994 Regulation 5.04(2) | Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

Reasons for decision: Summary: Following the commutation of the X flexi pensions, the pensions ceased, and the balance of the reserve account ceased 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 a pension that was payable by The Fund. As the reserve from which the proposed allocation to be made is not a reserve which meets the requirements of paragraph 292-25.01(4)(b) of the ITAR 1997, if the balance of the reserve account is allocated to the member to commence an account based pension, the amount of the allocation will be a concessional contribution. | Detailed Reasoning - Detailed reasoning: Subsection 291-25(1) of the Income Tax Assessment Act 1997 (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) and each amount covered under subsection 291-25(3). Subsection 291-25(3) of the ITAA 1997 provides that concessional contributions for an income year include certain amounts allocated for the individual in accordance with conditions specified in the regulations. Relevantly, paragraph 292-25.01(4)(b) 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 - Question.1: There is no definition of 'reserve' in either the ITAA 1997 or the ITAR 1997. The Commissioner believes that a 'reserve' for the purposes of subregulation 292-25.01(4) of the ITAR 1997, 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 this case, based on the information provided, the member made a request to the Trustee of the Fund in the 2003-04 income year, to commence X flexi pensions. You have stated that the flexi pensions at all times satisfied the requirements of subregulation 1.06(6) of the SISR and when these pensions were commuted, the pensions were paid in accordance with subregulation 1.06(6) of the SISR. A pension will meet the requirements of subregulation 1.06(6) of the SISR if, amongst other criteria - if the pension can be commuted (except for a limited prescribed purpose), the commutation amount is limited to a sum that is not greater than the amount determined by applying the appropriate pension valuation factor under Schedule 1B of the SISR to the pension as if the commencement day were the day on which the commutation occurs. Accordingly, any amounts in excess of this maximum amount that are considered to be maintained to support the 1.06(6) pension, cannot form part of the commutation lump sum. To the extent that the rules of the Fund purport to provide otherwise, they will not meet the standards of 1.06(6) of the SISR. In commencing these pensions, a member essentially exchanges an amount of capital for certain rights - a right to receive an income stream, and a right for a certain amount to be returned in the event the pension is commuted. The amount that the member exchanges for these rights becomes an amount that is available to the trustee of the fund, not the member, to satisfy the trustee's liability to pay the pension. The Commissioner is of the view that the amount exchanged is an amount set aside to be used for a particular purpose. On 30 June 20XX, the member made a number of requests to the Trustee of the Fund to commute their flexi pensions and commence account based pensions with each of the commutation amounts. Separate minutes of meeting of the Trustee of the Fund held on 30 June 20XX were taken with respect to the commutation of each of the flexi pensions. These minutes state that the commutation value of each of the pensions was calculated by the Fund actuary. These minutes noted that the remainder of the amount set aside to provide the flexi pensions constituted Fund reserves, and also noted that the amount to be allocated to provide the account based pensions would be drawn from the reserves historically maintained to provide the flexi pensions. Further minutes of meeting of the Trustee of the Fund and letter from the Trustee to the member, both dated 30 June 20XX, state that as a result of the commutation of the respective pension, that pension had now ceased. It could be concluded then, that throughout the period during which the flexi pensions were being paid, the Trustee of The Fund maintained a reserve for the purpose of enabling The Fund to discharge its liabilities in respect of the flexi pensions that were payable by The Fund. On the commutation of the flexi pensions, the commutation amount of each pension, calculated by The Fund actuary, was allocated to the member to commence a number of account based pensions. (These allocations may have met the exception in paragraph 292-25.01(4)(b) of the ITAR 1997 if the Trustee of the Fund has evidence confirming that the reserve was used solely for the purpose of enabling the fund to discharge all or part of its liabilities in respect of the pensions that were payable by the fund at that time.) Whilst there was an amount remaining in the reserve following the commutation of the flexi pensions, the pensions ceased at that time, and consequently, the reserve was no longer a reserve being used to enable The Fund to discharge its liabilities in respect of the payment of any pensions. The Fund’s Trust Deed makes clear that any amount held in The Fund’s reserve account does not form part of any accumulation or pension account and any investment return (positive or negative) derived by The Fund on the reserve account shall be debited or credited to the reserve account from The Fund’s income account. Consequently, following the commutation of the flexi pensions, the reserve being maintained by the Trustee of the Fund is no longer being maintained solely for the purpose of enabling the Trustee of the Fund to discharge its liabilities in respect of pensions that are payable by The Fund. Regulation 5.04(2) of the SISR sets out that for an accumulation fund a member’s minimum benefits are all the member’s benefits in the fund. In this case, when the member exchanged the capital that was their superannuation interest for the right to be paid flexi pensions under regulation 1.06(6), the flexi pension then formed their minimum benefits. This included the limitation that only so much was payable as a commutation lump sum. Therefore The Fund has not contravened the minimum benefit requirements when it commuted the member’s X flexi pensions in full and the amount above the maximum provided by Schedule 1B was left in a reserve. | Detailed Reasoning - Question.2: You have advised that the Trustee of the Fund now wishes to allocate the balance of the reserve to the member to commence an account based pension. As the reserve from which the allocation is to be made is not a reserve which meets the requirements of paragraph 292-25.01(4)(b) of the ITAR 1997, the exception in that provision to the allocation being a concessional contribution does not apply. Your contention regarding the meaning of the phrase 'as soon as practicable’ is not relevant. On commutation, the pensions ceased, and the reserve was no longer a reserve used solely for the purpose of enabling the fund to discharge its pension liabilities. Had the balance of the reserve been allocated to commence an account based pension immediately following the commutations, the allocation would still have been a concessional contribution. Paragraph 292-25.01(4)(a) of the ITAR 1997 also provides an exception with respect to an allocation made from a reserve where the following conditions are met: ● The amount is allocated in a fair and reasonable manner to an account for every member of the fund, and ● The amount that is allocated for the financial year is less than 5% of the value of the member’s interest in the fund at the time of allocation In this case, as an allocation of the reserve would exceed 5% of the member’s interest in The Fund, paragraph 292-25.01(4)(a) of the ITAR 1997 also would not apply to except the allocation from being a concessional contribution. Therefore, if the balance of the reserve account is allocated to the member to commence an account based pension, the amount of the allocation will be a concessional contribution.

Following the commutation of X flexi pensions paid in accordance with subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR), is the remaining balance of the reserve (which was in excess of the commutations amounts) considered to be a reserve used solely for the purpose of enabling the fund, to discharge all or part of its liabilities as soon as they become due in respect of a pension that was payable by the fund, as per subregulation 292-25.01(4) of the Income Tax Assessment Regulations 1997 (ITAR 1997)? | Following the commutation of the flexi pensions, if the balance of the reserve which previously supported the payment of those pensions is allocated to the member, to commence an account based pension, will the amount of the allocation be a concessional contribution?