Private ruling: CSS indexed pension partially funded by a roll-over
Published: June 2012
Ruling period: 1 July 2011 to 30 June 2015
Date scheme commenced: 1 July 2011

Ruling: Q1: 1. Will the taxable component of a standard indexed pension paid to a member of the Commonwealth Superannuation Scheme (CSS) include an element taxed in the fund when the employer component of a transfer value originating in a taxed fund is paid to the CSS? 2. Are you entitled to a tax offset on a portion of the indexed pension paid from the Consolidated Revenue Fund in the 2011-12 to the 2014-15 income years? Advice/Answers: 1. Yes. 2. Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 307-295(2). | Income Tax Assessment Act 1997 Subsection 307-225(3). | Income Tax Regulations 1997 307-200.03(2). | Income Tax Regulations 1997 307-200.03(3). | Income Tax Assessment Act 1997 Section 307-125. | Income Tax Regulations 1997 307-205.02B. | Income Tax Assessment Act 1997 Subsection 280-30(2). | Income Tax Assessment Act 1997 Section 301-10. | Income Tax Assessment Act 1997 Section 301-25. | Income Tax Assessment Act 1997 Subsection 301-25(1). | Income Tax Assessment Act 1997 Subsection 301-25(2). | Income Tax Assessment Act 1997 Section 301-100. | Income Tax Assessment Act 1997 Section 307-210. | Income Tax Assessment Act 1997 Section 307-215 | Income Tax Assessment Act 1997 Section 307-275

Reasons for decision: Summary: You are eligible to claim a tax offset on the taxable component (element untaxed in the fund) of your indexed pension at a rate of 10%. The element taxed in the fund is not assessable and not exempt income, that is, it does not have to be included in your tax return. The tax free component is not assessable income and not exempt income. It is also not included as assessable income in your tax return. | Detailed Reasoning - Taxation treatment of superannuation pensions from 1 July 2007: The taxation treatment of a superannuation income stream is based on: Ÿ the age of the benefit recipient; Ÿ whether the benefit comprises a tax free component and/or a taxable component ; and Ÿ whether the taxable component of the benefit includes o an element taxed in the fund; and/or o an element untaxed in the fund. | Detailed Reasoning - Components of a superannuation income stream: As the CSS is a public sector superannuation scheme section 307-295 of the ITAA 1997 applies to benefits paid from it. Under subsection 307-295(2) of the ITAA 1997 if a superannuation benefit is not sourced to any extent from contributions made into a superannuation fund or earnings on such contributions, the benefit will consist wholly of an element untaxed in the fund. This is usually the situation regarding the payment of the indexed pension from the CSS. That is, the pension is not usually sourced to any extent from contributions made into a superannuation fund and the indexed pension consists wholly of an element untaxed in the fund. In your case, however, contributions made on your behalf into other complying superannuation funds (that were not constitutionally protected funds) and earnings on those contributions have been rolled-over into the CSS and the employer component of this transfer value was used to provide you with additional years of contributory service in calculating your indexed pension entitlement. Section 307-200 of the ITAA 1997 provides that regulations may specify for a superannuation interest to be treated as two superannuation interests in certain circumstances. The regulations may also specify the way of treating a superannuation interest in relation to the element taxed in the fund and the element untaxed in the fund. Regulation 307-200.03 of the Income Tax Assessment Regulations (ITAR 1997) deals with the circumstances in which an interest in a public sector superannuation scheme is to be treated as two or more superannuation interests. Paragraph 307-200.03(2)(a) of ITAR 1997 provides that if the superannuation benefit to be paid is sourced partly from contributions made into the scheme or earnings on those contributions and partly from 1 or more other sources it is to be treated as two superannuation interests. The indexed pension paid to you will be sourced: Ÿ partly from contributions made into the scheme (the employer component of $X) since the employer component was converted into a credit of additional contributory service; and Ÿ partly from the Commonwealth. Hence, subregulation 307-200.03(2) of the ITAR 1997 requires that the interest supporting the indexed pension payable to you be treated as 2 separate interests. Under subregulation 307-200.03(3) of the ITAR 1997, the 2 interests are: Ÿ a 'contributions' interest consisting of contributions made into the CSS scheme that were converted to a credit of additional contributory service (the employer component); and Ÿ a 'remainder' interest consisting of the remainder of the amount sourced from the Commonwealth. All benefits paid from the 'remainder' interest will consist of an element untaxed in the fund only, in accordance with subsection 307-295(2) of the ITAA 1997. All benefits paid from the 'contributions' interest will consist of a tax free component and/or an element taxed in the fund only. When you commence the pension the following should be taken into account in determining the proportion of the indexed pension that will be an element taxed in the fund. Firstly, if you have any pre July 1983 service you should check with CSS if the employer component has been included by them in your superannuation interests when calculating the crystallised segment as at 30 June 2007. If the 'contributions' interest has a crystallised segment, this will be the tax free component of the contributions interest (section 307-210 of the ITAA 1997). The rest of the 'contributions' interest will be a taxable component which is all an element taxed in the fund (sections 307-215 and 307-275 of the ITAA 1997). Secondly it will be necessary for the CSS to determine the proportions of each indexed pension that is paid from the 'contributions' and the 'remainder' interests. In order for the CSS to calculate the proportions of each indexed pension payment that are paid from the two interests, it will be necessary for the total value of the two interests supporting the indexed pension to be determined as at the commencement date of the pension. The method of valuing the combination of the two interests supporting the indexed pension payable to you is set out in regulation 307-205.02B of the ITAR 1997 and is: Ÿ if the CSS had a practice for valuing the indexed pension payable to you, in use immediately before 28 June 2007, by using that practice; or Ÿ otherwise, by using the method set out in subregulation 307-205.02(2) of the ITAR 1997. The proportion of each benefit paid from each interest will then be determined using the following method: Ÿ Let the combined value of the two interests supporting the indexed pension at its commencement date be $X. Ÿ The value of the 'contributions' interest is equal to the amount of the employer component of the transfer value ($employer component). Ÿ The proportion of each indexed pension payment that is paid from the 'contributions' interest will be equal to ($employer component / $X). Ÿ The proportion of each indexed pension payment that is paid from the 'remainder' interest will be [1- ($employer component / $X)]. The proportion of each indexed pension payment that is paid from the 'remainder' interest will consist of an element untaxed in the fund only. The proportion of each indexed pension payment that is paid from the 'contributions' interest will consist of a tax free component and /or an element taxed in the fund only. According to the proportioning rule in section 307-125 of the ITAA 1997, when a superannuation income stream benefit is paid from a superannuation interest the benefit will include tax-free and taxable components calculated in the same proportion that those components make up the total value of the superannuation interest. Therefore the proportion of each indexed pension payment that is paid from the 'contributions' interest must be divided between the tax free component (if any) and the element taxed in the fund in the same ratio as in the 'contributions' interest at the commencement date of the indexed pension, where the ratios are as follows: Ÿ the ratio of the tax free component of the original 'contributions' interest is (crystallised segment / $ employer component), and Ÿ the ratio of the element taxed in the fund of the original 'contributions' interest is [1 - (crystallised segment / $ employer component)]. | Detailed Reasoning - Taxation treatment of indexed pension where the recipient has reached age 60: As you turned 60 and then commenced to receive the indexed pension, the element taxed in the fund is not assessable and not exempt income, that is, it is not included in your tax return. This is in accordance with section 301-10 of the ITAA 1997. The tax free component is not assessable income and not exempt income (section 301-10 of the ITAA 1997). It is also not included as assessable income in your tax return. The taxable component (element untaxed in the fund) of the pension is included in assessable income and taxed at marginal rates plus Medicare levy (subsection 301-100(1) of the ITAA 1997). However, a tax offset of 10% will apply to the taxable component (element untaxed in the fund) of the pension to reduce your tax liability (subsection 301-100(2) of the ITAA 1997). The payment summary you receive from CSS in relation to the indexed pension will show the various components of the pension.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: Your are over 60 years of age. | You were a Commonwealth Public Servant and you are a member of the Commonwealth Superannuation Scheme (CSS). | The CSS is a hybrid scheme - part accumulation and part defined benefit. | The accumulation benefit is comprised of member contributions (non-concessional) and employer productivity contributions (concessional) which accumulate with fund earnings and are payable as a lump sum or non indexed pension. | The defined benefit is the employer financed component and is payable as a CPI-indexed pension. The CPI-indexed pension is based on your age, years of contributory service and final salary. | The CPI-indexed defined benefit pension is only determined at the time the benefit becomes payable and is paid from the Consolidated Revenue Fund (CRF). | You left the Commonwealth Public Service for a period of time. | As a previous member of CSS you elected to rejoin the scheme upon re-entering the Commonwealth Pubic Service. | Upon re-joining the CSS you rolled-over amounts of superannuation from other complying superannuation funds (that were not constitutionally protected funds) into the CSS. | In a letter CSS advised that amounts received from complying superannuation funds were accepted by the CSS. | The roll-over amounts contained post June 1983 employer contributions which were taxed in the original funds. | Where certain conditions are satisfied a person may make an election to the CSS Board to have a roll-over amount treated as a transfer value. | The employee component of the transfer value is paid into the accumulation benefit component of the CSS. | The employer component of the transfer value is paid into the CRF and provides you with a credit of additional years of contributory service towards the employer financed defined benefit. | If a transfer value does not include a productivity amount then a "notional" productivity amount will be deducted from the employer component of the transfer value. The notional productivity amount will be paid into the accumulation benefit with CSS and credited to your account as additional productivity contributions. | The CSS Board accepted your election to have the rolled-over amounts treated as a transfer value. | Personal contributions of and an amount treated as a notional productivity amount were credited to your accumulation benefit. | The remaining amount represented the employer component of the transfer value. This amount was paid into the CRF and you were granted an additional years of contributory service towards your employer financed defined benefit pension. | You retired in the 20XX income year and have commenced to receive an indexed pension from the CSS.