Private ruling: Roll-over of superannuation benefits
Published: March 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is the payment of superannuation benefits into a solicitor's trust account a roll-over into a complying superannuation fund? | A1: No. | Q2: Does the payment from a solicitor's trust account constitute a superannuation benefit? | A2: No. | Q3: Is the payment made from a complying superannuation fund (the Fund) to your client's self managed superannuation fund a roll-over of superannuation benefits? | A3: Yes.

Relevant facts and circumstances: Your client was employed with an Employer (the Employer) and a member of a complying superannuation fund (the Fund). Your client is also a member a self-managed superannuation fund (the SMSF). Documentation provided shows legal proceedings had commenced between your client and your client's spouse (the spouse). Prior to the relevant income year a Court Order was made in relation to your client and the spouse. As part of the Court Order required that in certain circumstances, monies withdrawn from the Fund by your client were to he held in a solicitor's trust account pending certain matters. In the relevant income year the Fund informed your client that, amongst other matters: · it had determined that your client was suffering from a medical condition; · your client's benefits in the Fund would be payable upon your client's termination of employment; and · the Fund had advised the Employer of its decision. Your client subsequently terminated employment with the Employer. Your client requested not a withdrawal of their superannuation benefits but a roll-over into the SMSF. The Fund provided your client with a letter wherein it acknowledged receipt of your client's request and that the claim had been processed and paid as instructed by your client. In the letter from the Fund there was also enclosed information relevant to your client's benefit which included: (a) a benefit summary which stated all of your client's entitlements, as per your client's instructions were transferred to the SMSF; (b) a 'Rollover Benefits Statement' which shows all of your client's benefits in the Fund were to go into the SMSF; and (c) documentation which showed the composition of the payment. This also included how much of the payment was: (i) a tax-free component; and (ii) a taxable component. The cheque issued by the Fund was made in favour of the SMSF (the Cheque). The Fund sent the Cheque to the spouse's solicitors (the Solicitors) stating the Cheque was sent to them as per the Court Orders. A copy of an extract from the Solicitor's Ledger has been provided which shows the following: (a) the spouse's name; (b) the matters for which the Ledger relate; (c) the date the Cheque was credited to the Solicitor's trust account (the Trust Account); and (d) the last transaction on the extract which relates to the payment of all of your client's superannuation benefits to the SMSF. Your client is less than 55 years of age.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 306 | Income Tax Assessment Act 1997 Section 306-5 | Income Tax Assessment Act 1997 Section 306-10 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act Regulations 1997 Regulation 306-10.01 | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 42A

Reasons for decision: Summary: The payment of your client's lump sum superannuation benefits from the Fund to your client's self managed fund (SMSF) is considered a roll-over of superannuation benefits. The fact that the payment was deposited into a solicitor's trust account before being paid into the SMSF does not invalidate the roll-over. | Detailed Reasoning - Detailed reasoning: Division 306 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the tax treatment of payments made from one superannuation plan to another superannuation plan and of similar payments. Section 306-10 of the ITAA 1997 states: A superannuation benefit is a roll-over superannuation benefit if: (a) the benefit is a superannuation lump sum and a superannuation member benefit; and (b) the benefit is not a superannuation benefit of a kind specified in the regulations; and (c) the benefit satisfies any of the following conditions: (i) it is paid from a complying superannuation plan; …and (d) the benefit satisfies any of the following conditions: (i) it is paid to a complying superannuation plan … (emphasis added) In your client's case the facts show paragraphs 306-10(a),(b) and (c) are satisfied as: (a) a superannuation lump sum payment was made in relation to your client as your client was a member of a superannuation fund (the Fund); (b) the benefit, that is, the superannuation lump sum payment, is not of a kind specified in the regulations (Regulation 306-10.01 of the Income Tax Assessment Act Regulations 1997); and (c) the Fund is a complying superannuation plan. In view of the above, subparagraph 306-10(d)(i) of the ITAA 1997 is the only remaining relevant condition to determine whether the superannuation lump sum payment (the Payment) made by the Fund is a roll-over superannuation benefit. Accordingly, it must be demonstrated that the Payment was 'paid to a complying superannuation plan' and in your client's case, as indicated by the facts, whether that plan was a complying superannuation fund . | Detailed Reasoning - Complying superannuation fund: Subsection 995-1(1) of the ITAA 1997 states a: complying superannuation fund means a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 Further to the meaning of a complying superannuation fund in section 45 of the SISA, it should also be noted that under section 42A a self-managed superannuation fund is a complying superannuation fund when the entity is a resident regulated superannuation fund and does not contravene one or more of the regulatory provisions after the Regulator (that is, the Commissioner of Taxation) takes into account various matters (subsections 42(1A) and 42A(5) of the SISA). In relation to regulatory provisions this includes, though not exhaustive, that: · a trust has been set up; · a trust deed has been created; · there is an investment strategy in relation to the fund; and · annual returns for the fund in the approved form are lodged with the regulator. | Detailed Reasoning - Superannuation fund: In relation to what constitutes a superannuation fund, subsection 995-1(1) of the ITAA 1997 states it has the meaning given by section 10 of the SISA, that is: superannuation fund means: (a) a fund that: (i) is an indefinitely continuing fund; and (ii) is a provident, benefit, superannuation or retirement fund ; or (b) a public sector superannuation scheme . (emphasis added) The Macquarie Dictionary (third edition) defines superannuation fund as: a retirement fund to which an employee (and usually also the employer) contribute during the period of employment, and which provides benefits after retirement. … In the Full High Court decision Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ) Justice Kitto considered the expression 'provident, benefit or superannuation fund established for the benefit of employees'. This phrase is slightly different from that above as it excludes the term 'retirement' and includes 'established for the benefit of employees'. However, the judgement in the case still provides a guide as to the meaning of a provident, benefit or superannuation fund. In Mahony, Justice Kitto recognised that there is no definition in the Income Tax Assessment Act 1936 (ITAA 1936), nor is there in the ITAA 1997, to determine the meaning of a 'provident, benefit, or superannuation fund'. He referred to each of the three terms in the expression separately in his judgment. Justice Kitto said: the meaning of the several expressions must, therefore, be arrived at in the light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words "provident", "benefit" and "superannuation" must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees. Justice Kitto went on to state: First, the trustees were required to pay to or for the benefit of any employee, or to a dependant of his, such sum as the employer might direct; but the direction might be given not only because of some misfortune, but " for any other reason whatsoever ", so that the fund was not, because of the provision for these payments, a fund of any of the three special descriptions. Secondly, under provisions in the deed for the winding up of the fund, an equal distribution among the employees of the employer was required if, as was the fact at all material times, there was no member. This again, if it should take effect, would yield a benefit to the employees, but not a benefit of any such special character that the fund could properly be described, on that account, as a "provident", "benefit" or "superannuation fund". (emphasis added) Justice Kitto held that the fund had to exclusively be a provident, benefit or superannuation fund and that inferred a purpose narrower than the purpose of conferring benefits in a completely general sense. This narrower purpose meant that the benefits had to be characterised by some specific future purpose such as the example given by Justice Kitto of a funeral benefit. Justice Taylor also ruled that the fund had to be established exclusively for the purposes set out in the legislation. The view that a superannuation fund should be established for the sole purpose of providing superannuation benefits on retirement is also supported in the High Court decision Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290 ( Scott ). Justice Windeyer said: ... there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. Accordingly, the Commissioner of Taxation's view is that a fund, to be classified as a superannuation fund, must exclusively provide a narrow range of benefits that are characterised by some specific future purpose, that is, the payment of superannuation benefits upon retirement or death of the individual or as specified under the SIS legislation. | Detailed Reasoning - Solicitor's trust account: A solicitor's trust account is not considered to be a superannuation fund as such accounts are not established solely for retirement or provident purposes but can be for used for purposes which might include: · separation and divorce · estate matters · conveyancing in relation to the sale and/or purchase of property · settlement of claims · funds to pay legal fees Further to not being a superannuation fund, it should also be noted that a payment from a solicitor's trust account is not a superannuation benefit as it does not satisfy the description of a superannuation benefit which is provided in a table in subsection 307-5(1) of the ITAA 1997. The case Player v. Federal Commissioner of Taxation [2011] FCA 869, 2011 FCA 20-271; [2012] ALMD 3670; [2012] ALMD 4068 ( Player's Case ) was an appeal case relating to the Administrative Appeals Tribunal decision in [2011] AATA 35; (2011) 2011 ATC 10-171; [2012] ALMD 3669; (2011) 82 ATR 184. It is noted that Player's Case commented on the issue of whether section 306-10 of the ITAA 1997 would be satisfied if a superannuation benefit was not directly paid into a complying superannuation fund. In Player's Case , a $355,000 superannuation benefit from a complying superannuation fund, which was paid by cheque, was deposited into the taxpayer's bank account whereupon the taxpayer immediately purchased a bank cheque for $355,000 in favour of another complying superannuation fund which accordingly banked the cheque. The taxpayer did not choose to exercise the roll-over election available to her as the recipient of an ETP but included the taxable amount of the ETP as assessable income in her income tax return for the relevant income year. Subsequent to an assessment being made for the relevant year, and an excessive contributions notice being made, one of the issues the taxpayer raised in an objection, which was disallowed, was that the $355,000 transaction was a roll-over. In deciding Player's Case , Justice Edmonds, at paragraph 17, agreed with the Administrative Appeals Tribunal in [2011] AATA 35 by stating: …The Tribunal at [30] of its reasons seriously questioned the Commissioner's contention that the requirements of s 360-10 will be satisfied only if a payment is made directly by a complying superannuation plan to a complying superannuation plan; so that if the amount is first deposited to a different account before being on-paid the requirements of the section will not be satisfied. The Tribunal said: 'The Respondent contends that the requirements of section 306-10 will be satisfied only if a payment is made directly by a complying superannuation plan to a complying superannuation plan and so if that amount is first deposited to a different account before being on-paid the requirements of the section will not be satisfied. I am by no means sure that so technical a meaning of the section is correct but it is not necessary for me, for the purposes of this decision, to come to a firm conclusion to as to this issue. I would have thought that it could be argued that where (by way of example) a superannuation plan pays money into a solicitor's trust account with a direction that the amount be on-paid to a superannuation plan the legislative provisions might be said to be satisfied ." (emphasis added) I totally agree with this observation. Further at paragraphs 22 and 23 in Player's Case, Justice Edmonds stated: 22. So understood, there is one ground of the amended notice of appeal which raises a question of law grounded in the Tribunal's reasons, and that is ground 5.1A: '5.1A The Tribunal erred in law in not finding that if she [the taxpayer] did obtain a beneficial interest it did not prevent it from finding the $355,000 was a roll-over superannuation benefit within s.306-10 of the ITAA 97'. That ground raises a question of law grounded in the Tribunal's reasons at [28] where the Tribunal said: 'If she received it both legally and beneficially section 306-10 cannot apply.' 23. In my view, the Tribunal was correct in so concluding and, in consequence, its reasons for decision disclose no error of law. The above case indicates that a payment which is not made directly from one complying plan to another may still satisfy subparagraph 306-10(d)(i) of the ITAA 1997 in situations where the payment, as a result of a direction, is paid into a solicitor's trust account and that amount is on-paid into a complying superannuation plan. Where a person has both a legal and beneficial interest in the superannuation benefits, section 306-10 of the ITAA 1997 will not apply. In your client's case, your client has no legal interest as the intention was always to roll-over the monies, and not withdraw it from the superannuation system. In your client's case there was a clear direction that your client wanted the superannuation benefits in the Fund, which related to your client, to all be rolled-over directly into your client's SMSF as shown by: (a) a cheque prepared by the Fund which was written in favour of the SMSF; (b) the Rollover Benefits Statement recorded that all of your client's superannuation benefits in the Fund were to go to the SMSF; and (c) the Fund's letter wherein it acknowledged receipt of your client's claim form and that the claim had been processed and paid as instructed by your client. It is also noted however that a Court Order was made in relation to your client and your client's spouse (the spouse). As part of the Court Order it was stated that when funds where payable to your client from the Fund, they were to paid and held in the Trust Account of the spouse's solicitors pending certain matters. As a result of the Court Order, the Fund forwarded the payment of your client's superannuation benefits to the spouse's solicitors (the Solicitors) stating payment was sent to them as per the Court Orders. Despite there not being a direct roll-over of superannuation benefits from one complying plan to another, it is considered that this does not automatically negate the application of subparagraph 306-10(d)(i) of the ITAA 1997 in light of the comments in Player's Case as: (a) were it not for the Court Order, the facts show that your client's superannuation benefits from the Fund would have been deposited directly into an existing complying superannuation plan, that is, the SMSF, in accordance with your client's directions; (b) your client's directions to the Fund were for the full amount of your client's superannuation benefits to be rolled-over into the SMSF. Though the benefits were deposited into the Trust Account the facts show the Solicitors on-paid the full amount of your client's superannuation benefits into the SMSF. The facts show that none of your client's superannuation benefits were used while in the Trust Account and that the Solicitors released all of the benefits in favour of the SMSF. In view of all of the above, it is considered that your client's superannuation benefits being on-paid from the Trust Account to the SMSF satisfies subparagraph 306-10(d)(i) of the ITAA 1997. Accordingly, as all the relevant conditions in section 306-10 of the ITAA 1997 have been satisfied, the payment of your client's lump sum superannuation benefits from the Fund to his SMSF, after having been deposited into a solicitor's trust account as a result of a court order, is considered a roll-over of superannuation benefits.