Private ruling: Valuation of flexi pensions
Date of advice: 20 June 2018
Published: August 2018

Ruling: Yes

Relevant facts and circumstances: The Fund is a complying self-managed superannuation fund. The trustee of the Fund is a Company Pty Ltd (the Trustee). The Member is a member of the Fund The Fund holds two flexi pensions (Flexi pensions) for the Member. Details of the pension provided including the Member’s date of birth, type of pension, pension start date, term of pension, pension increases and RCV ( if any ) The Flexi Pensions meet the requirements in subregulation 1.06(6) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). You have requested that the Commissioner exercise his discretion to allow the entirety of the Flexi pensions to be rolled back into accumulation. You have further requested that if the Commissioner does not exercise his discretion that we advise you how the Flexi pensions would be valued for transfer balance tax purposes under s307-205(1) (a) of the Income Tax Assessment Act 1997 ? You contend that: Under the current regulation, flexi-pensions can be commuted. If this occurs Trustees should the pension valuation factors set out in the Schedule 1B of the SISR to determine the maximum allowable commutation amount. However the SISR only contemplates lifetime pensions and have no factors for fixed term pensions or RCV. Nor are these pensions contemplated on the ATO website. It was on this basis that you requested the Commissioners discretion (the application of which we have addressed in Question 1) based on the following factors: a. There are no tax revenue ramifications for the ATO if discretion was granted. Earnings on the member balance, whether held with Reserves or that is commuted to Accumulation remains taxed at 15% within the Fund. It is entirely likely that any withdrawals to a personal tax scale or to a non-financial dependant would increase tax revenues b. Pension valuation factors included in Schedule 1B of the SISR do not include factors to assist in determining the treatment of flexi pensions and RCVs c. At the time the pension accounts were established (1/01/2004), the accounts complied with the rules and regulations existing at that time. The inability to commute and/or access the funds would unfairly penalise the Member for undertaking a legitimate pension strategy at the time and d. Commuting to accumulation would provide simplicity to the Member and Trustee in managing the Member’s account. An inability to commute the balance to accumulation would significantly increase the complexity and compliance costs as a result of Superannuation changes being forced upon the applicant.

Relevant legislative provisions: Taxation Administration Act 1953 subsection 359-5(1) | Taxation Administration Act 1953 subsection 359-35(2) | Taxation Administration Act 1953 subsection 359-35(3) | Taxation Administration Act 1953 Division 370 | Income Tax Assessment Act 1997 (ITAA 1997) section 294-15 | Income Tax Assessment Act 1997 subsection 294-20(1) | Income Tax Assessment Act 1997 section 294-25 | Income Tax Assessment Act 1997 section 294-25(1) | Income Tax Assessment Act 1997, section 294-35 (1) | Income Tax Assessment Act 1997, section 294-35 (3) | Income Tax Assessment Act 1997 section 307-205(1) | Income Tax Assessment Act 1997 section 307-205(1)(a) | Income Tax Assessment Act 1997 Subsection 307-80(1) of the ITAA 1997 | Income Tax Assessment Regulations 1997 regulation 307-205.02 | Income Tax Assessment Regulations 1997 sub regulation 307-205.02 (2) | Income Tax Assessment Regulations 1997 sub regulation 307-205.02 (a) | Income Tax Assessment Regulations 1997 Clause 1 Schedule 1B | Income Tax Assessment Regulations 1997 Clause 2 Schedule 1B | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(6) | Superannuation Industry (Supervision) Regulations 1994 Schedule 1B

Reasons for decision: Summary: The Commissioner is unable to make a ruling on Questions 1 of your application because the matter sought to be ruled on is how the Commissioner would exercise a power under a relevant provision. The superannuation interest that is supporting the Flexi-pensions of the Member is to be valued for transfer balance cap purposes under paragraph 307-205(1)(a) of the Income Tax Assessment Act 1997. | Detailed Reasoning - Commissioner’s Remedial Powers: In accordance with subsection 359-5(1) of 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. However, this obligation is subject to subsections (2) and (3) of section 359-5 of the TAA. Subsection 359-35(3) of the TAA states the Commissioner may also decline to make a private ruling if the matter sought to be ruled on is how the Commissioner would exercise a power under a relevant provision and the Commissioner has decided or decides whether or not to exercise the power. Division 370 of the TAA 1953 establishes a Remedial Power for the Commissioner which allows the Commissioner to determine one of more modifications to the operation of a provision of a taxation law by a disallowable legislative instrument in accordance with certain limitations. The Remedial Power is discretionary, so the Commissioner can choose whether or not to exercise the power. The Commissioner cannot be compelled to exercise this power. Based on the above, in accordance with subsection 359-35(3) of the TAA we will not be making a private ruling in respect of Question 1 of your application. We are however, able to offer general advice which, whilst not binding on the Commissioner, the Australian Taxation Office will stand by and will not depart from unless: ● the law has changed since the advice was given; ● a final court decision has affected our interpretation of the law since the advice was given; or ● for any reason, the advice is no longer considered appropriate – for example, if commercial practice has changed, the advice has been exploited in an abusive and unintended way or the advice is found on reconsideration to be wrong in law. The Commissioner of Taxation has limited powers to modify the operation of tax law in circumstances where entities will benefit, or at least be no worse off, as a result of the modification. The Commissioner's remedial power (CRP) is a discretionary power. The Commissioner can use this power in limited circumstances where law change would otherwise be required to address instances where the law is not operating as intended by Parliament. The CRP is to be used as a last resort where alternative options, such as administrative or interpretive approaches, are not adequate to resolve an issue. The CRP may only be used to resolve general issues that arise for all entities, or issues that impact a particular class of entities. It cannot be used to resolve specific issues affecting a particular individual or entity. The CRP is not an alternative to objecting to a decision made by the Commissioner. The CRP provides a streamlined process to create certainty for taxpayers. This facilitates the more timely resolution of unforeseen or unintended outcomes in tax and superannuation law than primary law change. It also allows legislative resources to be prioritised towards more significant changes. The CRP may be applicable where the current law is producing unintended, negative impacts for entities, or is creating excessive compliance costs. The CRP has legal limitations and any modifications made using the power must: •not be inconsistent with the intended purpose or object of the law •have a negligible budget impact •only apply where outcomes for an entity will be no less favourable than the existing law. The Commissioner will consult publicly as part of exercising the power. Modifications are subject to Parliamentary oversight and do not apply until the 15 sitting day disallowance period has concluded. If you wish to submit potential candidates for resolution using the Commissioner’s remedial powers you can do so using the form on the ATO website. I have included the link for your convenience: | Detailed Reasoning - Transfer balance account: Pursuant to section 294-15 of the Income Tax Assessment Act 1997 (ITAA 1997), a person commences to have a transfer balance account (TBA) if they have, at any time, been the retirement phase recipient of a superannuation income stream. The transfer balance account commences on the later of 1 July 2017 or the day that a person first starts to be a retirement phase recipient of a superannuation income stream. Subsection 294-20(1) of the ITAA 1997 states that a person is a retirement phase recipient of a superannuation income stream at a time if they have a superannuation income stream in the retirement phase at that time and a superannuation income stream benefit is payable at that time. Subsection 307-80(1) of the ITAA 1997 states that a superannuation income stream is in the retirement phase if a superannuation income stream benefit is payable from it at that time. In this instance you have advised that the Member is receiving two Flexi pensions from the Fund. A flexi-pension is a superannuation income stream paid under regulation 1.06(6) of the Superannuation Industry Regulations 1994 ( SISR).Consequently, the Member is considered to be a recipient of a retirement phase recipient of a superannuation income stream and the members TBA commenced on 1 July 2017. | Detailed Reasoning - Transfer balance cap (TBC): In accordance with subsection 294-35(1) of the ITAA 1997, a person’s TBC for the financial year in which they first start to have a TBA account is equal to the ‘general TBC’ for that financial year. Subsection 294-35(3) of the ITAA 1997 sets the general TBC at $1,600,000 for the 2017-18 financial year. For a later financial year, the TBC is equal to a person’s TBC cap for the previous year, subject to proportional indexation. | Detailed Reasoning - Components of transfer balance cap: Section 294-25 of the ITAA 1997 sets out when a transfer balance credit arises and the amount of the credit. Relevantly, Item 1 of the table in subsection 294-25(1) of the ITAA 1997 specifies that where an individual is the recipient of a retirement phase income stream just before 1 July 2017, a credit of the value of the superannuation interest that supports the income stream just before 1 July 2017 arises in the transfer balance account on 1 July 2017. As the Member was the recipient of two retirement phase income streams just before 1 July 2017, a credit to the value of the superannuation interest that supports the Member’s income streams arises in the members TBA. Consequently the Members Flexi pensions are counted towards the Member’s $1,600,000 transfer balance cap. | Detailed Reasoning - Flexi pension with an RCV: Fixed term pensions provided under subregulation 1.06(6) of the SISR should have the terms and conditions or rules specified at the time the pension is set up. This includes whether the pension has a Residual Capital Value (RCV) and details in relation to that RCV. Unless the rules of the pension specify otherwise, the member has a right to receive an income stream, and a right to be paid the RCV when the term of the pension finishes. The payment of the RCV does not form part of the annual pension payment. Payment of the RCV is a superannuation lump sum benefit. If the pension rules allow for commutation before the end of the term, the amount available on commutation is a ‘withdrawal amount’ which is calculated by an actuary. The withdrawal amount is the value of future projected payments remaining for the investment term, considering indexation, and discounted to reflect that the payments will be made prior to the scheduled payment dates. If the pension has an RCV, it will also be necessary to calculate the present value of the RCV to reflect the fact that the payment will be made prior to the maturity date. In accordance with paragraph 1.06(6)(g) of the SISR, the lump sum available on commutation, the maximum commutable amount, is limited to the amount calculated using the pension valuation factors in Schedule 1B of the SISR. | Detailed Reasoning - Commutation: Where an individual’s flexi-pension is commuted, assets held in the reserve that supported the flexi-pension may be allocated to the member (noting that the amount commuted cannot exceed the maximum allowable commutation amount) to commence another superannuation income stream as soon as practicable without counting towards the member’s concessional contributions cap. Transitional Capital Gains Tax relief may be available (subject to other requirements) where the purpose of the commutation was to reduce the superannuation interests supporting superannuation income streams below the $1.6 million transfer balance cap prior to 1 July 2017. | Detailed Reasoning - Treatment of any excess once the pension has been commuted in full: A trustee of a superannuation fund may hold assets in a reserve that previously supported a flexi-pension, which exceeded the maximum amount that was able to be commuted under subregulation 1.06(6) of the SISR. Once the pension has been commuted, these assets constitute an unallocated reserve. The trustee may (subject to the applicable trust deed) allocate amounts from the unallocated reserve to all of the members of the fund in a fair and reasonable manner. Any allocation that is 5% or more of a member’s total interest in the superannuation fund will be a concessional contribution and count towards the member’s concessional contributions cap. | Detailed Reasoning - Valuation of the income stream for transfer balance cap purposes: In accordance with subsection 307-205(1) of the ITAA 1997, the value of a superannuation interest at a particular time is: (a) if the regulations specify a method for determining the value of the superannuation interest — that value; or (b) otherwise — the total amount of all the superannuation lump sums that could be payable from the interest at that time. A superannuation interest that is supporting a flexi-pension is to be valued for transfer balance cap purposes under paragraph 307-205(1)(a) of the ITAA 1997 which refers to the regulations specifying a method for determining the value of the superannuation interest. The method to calculate the value of a superannuation interest is set out in regulation 307-205.02 of the Income Tax Assessment Regulations 1997 (ITAR). Flexi pensions are not covered by the exceptions in paragraph 307-205.02(1)(a) therefore the value of the superannuation interest supporting these pensions is worked out using the method set out in subregulation 307-205.02(2) of the ITAR 1997 which states The value of the interest at a particular time is the sum of: (a)the product of: (i) the annual amount of the superannuation income stream payable in respect of the superannuation interest at that time; and (ii) the applicable factor set out in clause 1 of Schedule 1B; and (b)the product of: (i) the nominal value of the superannuation lump sum, if any, which is payable in respect of the interest at a time in the future, other than a future lump sum which is a commutation of the income stream included in subparagraph (a)(i); and (ii) the applicable factor set out in clause 2 of Schedule 1B. For the purposes of the TBC, the annual pension amount of the Member’s Flexi Pensions is valued under clause 1 of Schedule 1B to the ITAR 1997 and any RCV is valued under clause 2 of Schedule 1B to the ITAR 1997 as a lump sum valuation.

Will the Commissioner exercise his discretion pursuant to the Commissioner’s remedial power under Division 370 of the Taxation Administration Act 1953 (TAA 1953).to allow the entirety of the flexi-pension accounts for ( the Member) to be rolled back to an accumulation account? | Answer: The Commissioner cannot make a ruling on this issue, general advice is provided instead. | Question 2: Will the superannuation interest that is supporting the flexi pensions be valued for transfer balance cap purposes under paragraph 307-205(1) (a) of the Income Tax Assessment Act 1997 ? | This advice applies for the following period: Income year ending 30 June 20XX