Private ruling: Commutation of complying life-time pension
Published: June 2014
Ruling period: 1 July 2013 onwards
Date scheme commenced: 1 July 2013

Ruling: Q1: Will any part of the full commutation of a lifetime complying pension to a market linked pension due to the expiration of the term of the pension be treated as a concessional contribution for the purposes of the concessional contributions cap? | A1: No, please refer to the explanation below.

Relevant facts and circumstances: The Fund was established under a trust deed. The Fund consists of two Members - Member A and Member B. Member A was born in the 1920s. Member A started received a complying fixed-term defined benefit pension in the late 1990s. The pension is paid in accordance with regulation 1.06(7) of the Superannuation Industry Supervision Regulations 1993 (SISR). The pension expires on late June 20XX. The total value of the assets underlying the defined benefit pension as at 1 July 2013 was in excess of $1 million. An actuary has certified (in accordance with regulation 9.31 of the SISR that the assets would provide the amount required to discharge in full the current pension liabilities as they fall due. The following information was supplied: • The new pension will comply with SISR sub-regulation 1.06(8) • The commutation consists of the total value of the pension and the relevant reserve. The trust deed permits the commutation and the formation of the new pension.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 291-25. | 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 Act 1997 Former Subsection 292-25(3). | Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Act 2013 Section 3. | Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Act 2013 Schedule 1, Part 7 | Income Tax Assessment Regulations 1997 Regulation 292-25.01. | Income Tax Assessment Regulations 1997 Subregulation 292-25.01(4). | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06. | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(7). | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(8). | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(9A). | Superannuation Industry (Supervision) Regulations 1994 Regulation 6.17C.

Reasons for decision: Summary: If the total of the lump sum resulting from the commutation of the lifetime complying pension and the reserves will be used to commence a market linked pension, the exception under the income tax regulations is satisfied. Subsequently, no amount will be counted towards the member's concessional or non-concessional contributions caps for the relevant income year. | Detailed Reasoning - Detailed reasoning: Section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines amounts are included as concessional contributions for an income year. 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) and each amount covered under subsection 291-25(3). Subsection 291-25(3) of the ITAA 1997 includes in a person's concessional contributions for a financial year an amount in a complying superannuation plan that is allocated for the person for the year in accordance with the conditions specified in the regulations. For these purposes, section 3 and Part 7 of Schedule 1 of the Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Act 2013 states that the relevant regulation is regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997). Subregulation 292-25.01(4) of the ITAR 1997 provides that an amount allocated from a reserve is treated as being allocated in a way covered by the former subsection 292-25(3) (now subsection 291-25(3)) of the ITAA 1997 unless an exclusion in subregulation 292-25.01(4) of the ITAR 1997 applies. Paragraph 292-25.01(4)(b) of the ITAR 1997 excepts 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 stream, to commence another income stream, as soon as practicable; (C) …. There is no definition of 'reserve' in the ITAA 1997 or the ITAR 1997. The meaning of 'reserve' for the purposes of regulation 292-25.01 of the ITAR 1997 is to be determined by reference to its ordinary meaning, the context in which the word is used in that regulation and the purpose for which the regulation was enacted. However, in ATO Interpretative Decision ATO ID 2012/32, the Commissioner concluded that 'reserve' as used in regulation 292-25.01 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. ATO ID 2012/84 discusses the implications of allocating the funds from a 'pension reserve account' supporting a 'complying lifetime pension' in relation to excess contributions tax provisions and states that the Commissioner's view is that: …the complying lifetime pension account and pension reserve account together represent a reserve for the purposes of regulation 292-25.01 of the ITAR 1997, an amount allocated from either of the two accounts may satisfy sub-subparagraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997. | Detailed Reasoning - Commutation of a Complying lifetime pension: Superannuation income stream benefits include a complying lifetime pension that is paid under subregulation 1.06(7) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Regulation 6.17C of the SISR provides that if a regulated superannuation fund provides a complying life-time pension under the rules of subregulation 1.06(7), the trustee must not allow the pension to be commuted except in accordance with that subregulation. The circumstances under which a lifetime pension may be commuted are limited. They may be commuted to pay the superannuation contributions surcharge, to give effect to a payment split or a release authority in relation to excess contributions tax and in some cases for the benefit of the reversionary beneficiary. Under subparagraph 1.06(7)(g)(v) of the SISR, a complying lifetime pension may be commuted if the superannuation lump sum resulting from the commutation is transferred directly to purchase another income stream of a type specified in that regulation, for example a market linked pension paid under subregulation 1.06(8). In particular, sub-subparagraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997 is relevant and requires that: 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. As it is the Commissioner's view that the complying lifetime pension account and pension reserve account together represent a reserve for the purposes of regulation 292-25.01 of the ITAR 1997, an amount allocated from either of the two accounts may satisfy sub-subparagraph 292-25.01(4)(b)(ii)(B). Therefore, where: • the entire value of the complying lifetime pension account and the pension reserve account is allocated as the lump sum on commutation of the complying lifetime pension; and • that amount is used to commence the market linked pension for the relevant member; it is the Commissioner's view that the requirements in sub-subparagraph 292-25.01(4)(b)(ii)(B) of the ITAR 1997 would be satisfied. However, where an amount allocated either from the complying lifetime pension account or the pension reserve account is applied to commence a pension for the relevant member that meets only the requirements of subregulation 1.06(9A) of the SISR (to be an account-based pension), that amount cannot be said to be allocated 'on the commutation of' the complying lifetime pension. Therefore, as the total of the lump sum resulting from the commutation of the lifetime complying pension and the reserves will be used to commence a market linked pension, the exception under subregulation 292-25.01(4) of the ITAR 1997 is satisfied. Subsequently, no amount will be counted towards the member's concessional or non-concessional contributions caps for the relevant income year.