Private ruling: Transfer balance cap
Date of advice: 16 November 2017
Published: April 2018

Ruling: Q1: Is the child pension component of your reversionary pension included when calculating the ‘special value’ of the superannuation interest that supports this income stream for the purposes of subsection 294-135(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? Advice Yes.

Relevant facts and circumstances: Your spouse died in 2012. In mid-2012, Public Sector Superannuation Scheme (PSS) approved your application for a Spouse Benefit under the Superannuation Act 1990 . As such, you were eligible to receive a reversionary pension payable to you (as a spouse with an eligible child) for life, subject to twice yearly adjustments in line with upward movements in the Consumer Price Index. Your PSS fortnightly pension is a specified amount. This fortnightly pension payment is made up of two separate components, the spouse reversionary pension, as well as an additional child pension. The PSS calculated your special value towards your transfer balance cap, based on your PSS fortnightly pension payment. Once your child ceases to be eligible, either upon exit from full-time study or on their 25th birthday, the child pension component will be removed from the fortnightly pension paid.

Relevant legislative provisions: Taxation Administration Act 1953 Section 357-55 of Schedule 1 | Taxation Administration Act 1953 Paragraph 357-55(a) of Schedule 1 | Taxation Administration Act 1953 Section 359-5 of Schedule 1 | Income Tax Assessment Act 1997 Subdivision 294-B | Income Tax Assessment Act 1997 Section 294-15 | Income Tax Assessment Act 1997 Section 294-20 | Income Tax Assessment Act 1997 Section 294-25 | Income Tax Assessment Act 1997 Section 294-35 | Income Tax Assessment Act 1997 Section 294-80 | Income Tax Assessment Act 1997 Section 294-130 | Income Tax Assessment Act 1997 Subsection 294-130(2) | Income Tax Assessment Act 1997 Subsection 294-135(2) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Regulations 1997 Subregulation 294-130.01(2) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(2) All references are to the ITAA 1997 unless otherwise indicated.

Reasons for decision: Summary: The Commissioner is unable to make a private ruling on issues relating to excess transfer balance tax because excess transfer balance tax is not a tax assessed under the ITAA 1997. However, in the interests of sound administration, the Commissioner provides the following administratively binding advice in relation to these issues and in response to the question you have raised. The child pension component of your reversionary pension is included when calculating the special value of the superannuation interest that supports this income stream. | Detailed Reasoning - Private rulings: Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that the Commissioner may, on application, make a written ruling (a private ruling) on the way in which a relevant provision applies, or would apply, to an entity in relation to a specified scheme. For the purposes of section 359-5 of Schedule 1 to the TAA, the relevant provisions are defined in section 357-55 of Schedule 1 to the TAA and include certain provisions of Acts and regulations of which the Commissioner has general administration. However, none of the paragraphs in section 357-55 allow a private ruling to be given in relation to excess transfer balance tax. Paragraph 357-55(a) of Schedule 1 to the TAA does allow a ruling to be given on ‘tax’ however, in accordance with subsection 995-1(1) of the ITAA 1997, ‘tax’ means: a) income tax imposed by the Income Tax Act 1986 as assessed under this Act; or b) income tax imposed as such by any other Act, as assessed under this Act. Excess transfer balance tax is assessed and imposed under the Superannuation (Excess Transfer Balance Tax) Imposition Act 2016 and not the ITAA 1997. As such, it is not a ‘tax’ for the purposes of section 357-55 of Schedule 1 to the TAA. Therefore, the Commissioner cannot make a ruling on issues relating to excess transfer balance tax. In the interests of sound administration, the Commissioner will however, provide administratively binding advice in relation to these issues and in response to the question you have raised. Administratively binding advice is not legally binding on the Commissioner. When the time comes to assess liability to tax, the law as it then exists must be applied to the facts as established at that time. However, the ATO will stand by what is said in such advice and will not depart from it unless: ● there have been legislative changes since the advice was given ● a tribunal or court decision has affected our interpretation of the law since the advice was given, or ● for other reasons, the advice is no longer considered appropriate. For example, if the advice has been exploited in an abusive and unintended way. | Detailed Reasoning - Transfer balance account: Subdivision 294-B creates a transfer balance account (TBA) for you, and credits it, if you have a superannuation income stream in the retirement phase. You commence to have a TBA on the later of 1 July 2017 and the day you first start to be a retirement phase recipient of a superannuation income stream. If you are a retirement phase recipient of a superannuation income stream just before 1 July 2017 (at the end of 30 June 2017), your TBA commences on 1 July 2017 (section 294-15). You are a retirement phase recipient of a superannuation income stream at a time if a superannuation income stream benefit from the superannuation income stream is payable to you at that time (section 294-20). The table in section 294-25 sets out when a credit arises in your TBA and the amount of credit. Section 294-25 refers to a 'reversionary beneficiary'. A reversionary beneficiary is the nominated beneficiary of a superannuation income stream that automatically reverts to the nominated beneficiary on the death of the original superannuation income stream recipient. In these cases, the superannuation income stream does not cease, as the reversionary beneficiary is immediately entitled to receive it. Therefore, the ‘starting day’ (for the purposes of the TBA) for reversionary beneficiaries is the date of death of the original income stream recipient. As you commenced to receive pension payments from a reversionary PSS income stream (pension) in 2012, you were a retirement phase recipient just before 1 July 2017. Further, as a reversionary beneficiary, under item.1 of the table in section 294-25, a transfer balance credit arises in your TBA on 1 July 2017 in respect of your reversionary pension. | Detailed Reasoning - Transfer balance credit – special value: Note.1 to section 294-25 provides that the amount of the transfer balance credit is modified for certain capped defined benefit income streams. Capped defined benefit income streams are defined in section 294-130 and include lifetime pensions that meet the standards of subregulation 1.06(2) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Under subsection 294-130(2), a superannuation income stream is also a capped defined benefit income stream if the income stream is prescribed by the regulations for the purposes of that subsection. For the purposes of subsection 294-130(2), a superannuation income stream is prescribed if it is a pension that would meet the standards of subregulation 1.06(2) of the SISR except for the circumstances in which the rules under which the pension is paid allow for either or both of the following: (i) the pension to be commuted; (ii) the variation or cessation of pension payments in respect of a child of the deceased primary or reversionary beneficiary. Therefore, your reversionary pension, which allows for the variation/cessation in respect of the child component, is a capped defined benefit income stream in accordance with subregulation 294-130.01(2) of the ITAR 1997. Subsection 294-135(2) sets out a specific formula to work out the value of a superannuation interest that supports a capped defined benefit income stream. This value is called the ‘special value’ of the superannuation interest and gives rise to a credit in the TBA. The special value of superannuation interest that supports the pension is calculated by multiplying the annual entitlement by a factor of 16. The annual entitlement is worked out by annualising the first payment an individual is entitled to receive from the income stream across a year. The first pension payment you are entitled to receive on or after 1 July 2017 from the PSS pension is a specified amount and this is annualised based on the number of days to which the payment relates (14 days), multiplied by 365. Therefore, the annual entitlement is $X. Multiplying your annual entitlement by 16 equals $Y. A credit arises in your TBA for this amount. The special value of your PSS pension of ($X x Y) is credited to your TBA on 1 July 2017. The purpose of this rule is to provide a simple valuation rule based on general actuarial considerations. Once a credit arises in an individual’s TBA, any subsequent changes in the value of the supporting superannuation interest do not affect their TBA. | Detailed Reasoning - Debits that arise in your TBA: A debit may arise in an individual’s TBA in certain events. Section 294-80 sets out when debits arise in an individual’s TBA, and the amount of the debit. A debit may arise in the TBA from: ● a commutation of a superannuation income stream in the retirement phase ● structured settlement contributions ● an event that results in your superannuation interest being reduced (due to fraud dishonesty or bankruptcy) ● a payment split (divorce or relationship breakdown) ● a superannuation income stream failing to comply with the pension or annuity standards under which it is provided ● a superannuation income stream provider failing to comply with a commutation authority in respect of a particular superannuation income stream ● a notice being issued under section 136-70 in Schedule 1 to the TAA in relation to non-commutable excess transfer balance. However, with respect to a reversionary pension which includes a child component, the event of the child component ceasing when the child turns 25 years is not an event that gives rises to a debit in an individual’s TBA.

This advice applies for the following period: Income year ending 30 June 2018