Private ruling: Re-contribution strategy and Part IVA
Published: April 2013
Ruling period: Income year ended 30 June 2013
Date scheme commenced: On or after 1 January 2013

Ruling: Q1: Will the Commissioner apply Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) to the proposed superannuation re-contribution strategy? Advice/Answer No

Relevant facts and circumstances: Your client (the Taxpayer) is a member and an individual trustee of a self managed superannuation fund (the Fund), a complying superannuation fund. The spouse of the Taxpayer is the other member and individual trustee of the Fund. They have adult children who are non-dependants for tax purposes. The trust deed of the Fund permits the Fund to pay a superannuation income stream and to commute a superannuation income stream into a superannuation lump sum. The Taxpayer has commenced an account-based pension from the Fund. The balance of the Taxpayer's benefit in the Fund at 30 June 2012 was an amount under $200,000, split equally between the tax-free component and the taxable component. The taxable component does not contain an 'element untaxed in the Fund'. The Taxpayer, who is over 65 years of age, is gainfully employed for more than 40 hours during the relevant income year. No contributions were made by, or in respect of, the Taxpayer to the Fund for the 20XX and 20YY income years. The Taxpayer proposes to withdraw their entire benefit from the Fund some time in month in the relevant year. Within two weeks to a month of receiving the benefit, the Taxpayer will make a non-concessional contribution of approximately the same amount to the Fund and commence a new account-based pension from the Fund. No other contributions are planned to be made to the Fund for the relevant income year. The stated primary purpose of the transactions is to create a superannuation income stream that consists entirely of a tax-free component. This will maximise the Taxpayer's pension benefit should future legislation re-introduce tax on superannuation income streams for members of superannuation funds who are aged 60 or more. The secondary aim of the re-contribution strategy is to provide more fully for the Taxpayer's children in the event of the Taxpayer's death. The re-contribution of the commuted amount back to the Fund will eliminate the taxable component of the Taxpayer's benefit, which would otherwise be subject to tax should a non-dependent beneficiary receive a death benefit from the Fund on the Taxpayer's death. Currently the Taxpayer also receives a superannuation income stream benefit from another external superannuation fund. The Taxpayer does not have a plan to draw down their benefits in that fund for the purpose of making a contribution into any superannuation fund.

Relevant legislative provisions: Income Tax Assessment Act 1936 Paragraph 177C(1)(a). | Income Tax Assessment Act 1936 Paragraph 177C(1)(c). | Income Tax Assessment Act 1936 Section 177D. | Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(1)(a). | Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(1)(b). | Superannuation Industry (Supervision) Regulations 1994 Paragraph 1.06(9A)(a). | Superannuation Industry (Supervision) Regulations 1994 Regulation 1.07D. | Superannuation Industry (Supervision) Regulations 1994 Schedule 7.

Reasons for decision: Summary: Part IVA of the ITAA 1936 will not apply to the superannuation re-contribution strategy proposed by or on behalf of the Taxpayer. | Detailed Reasoning - Detailed reasoning: The Taxpayer is currently receiving an account-based pension from the Fund. The pension may be commuted to a superannuation lump sum if one of the circumstances listed in subregulation 1.07D(1) of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) applies. The Taxpayer intends to re-contribute back to the Fund an amount that approximates the superannuation lump sum in order to start a new account-based pension. The effect of the proposed re-contribution strategy, if implemented, will be that the superannuation interest in the Fund that supports the new pension will now consist entirely of a tax-free component. The flow-on effect of this is that, upon the death of the Taxpayer, any superannuation death benefit paid by the Fund to a non-dependant will be tax-free. Paragraphs 177C(1)(a) and (c) of the ITAA 1936 provide, relevant to the Taxpayer's case, that: Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or … and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph; … Section 177D of the ITAA 1936 states that: This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where: (a) a taxpayer (in this section referred to as the relevant taxpayer ) has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and (b) having regard to: (i) the manner in which the scheme is entered into or carried out; (ii) the form and substance of the scheme; (iii) the time at which the scheme is entered into and the length of the period during which the scheme will be carried out; (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (vii) any other consequence for the relevant taxpayer, or for any person referred to in subparagraph (vi), of the scheme having been entered into or carried out; and (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in subparagraph (vi); it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer … or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme … . Under section 177F of the ITAA 1936, the Commissioner may cancel a tax benefit that has been obtained in connection with a scheme. Relevantly, subsection 177F(1) states that: Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may: (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or … and, where the Commissioner makes such a determination, he or she shall take such action as he considers necessary to give effect to that determination. We note that you have made the following observations on whether any person will receive any tax benefit in connection with the re-contribution strategy: 1. Currently no tax is payable on the taxable component of a superannuation benefit that is paid to a member of a superannuation fund aged 60 or more. As the Taxpayer is over 65 years of age, the re-contribution strategy will not give the Taxpayer any tax benefit. The Taxpayer's financial position will not, therefore, change. 2. If the Taxpayer pre-deceases their spouse, the latter, being a death benefits dependant, will receive a death benefit tax free regardless of whether or not a re-contribution strategy is in place. No tax benefit will therefore be obtained by the Taxpayer's spouse in the event of the proposed re-contribution strategy being implemented. Neither will there be a change in the financial position of the Taxpayer's spouse. 3. If the Taxpayer survives their spouse and dies subsequently, the Taxpayer's adult children may each receive a death benefit that consists entirely of a tax-free component if the proposed re-contribution strategy is put in place, even though they are not death benefits dependants. This compares favourably with a death benefit that otherwise includes a taxable component assessable to the benefit recipient. In that sense these adult children will each be better off financially to the extent of any tax saved. 4. Apart from the above, there is no other consequence for the Taxpayer and the other individuals mentioned. In support of your submission that Part IVA of the ITAA 1936 should not apply to the proposed re-contribution strategy, you have also cited: (a) the edited version of private ruling authorisation number 43223; and (b) Media release 2004/058; that were published by the Australian Taxation Office (the ATO). In that private ruling, the Commissioner ruled that: The current superannuation tax laws provide a range of concessions to encourage people to save for their retirement by way of superannuation … the current superannuation regulations provide taxpayers with considerable flexibility and choice as to the timing and manner of drawing down their superannuation benefits on retirement. The actions the rulee intends to carry out involve him taking steps that the superannuation law permits him to take in order to maximise his retirement benefits. For these reasons … the Commissioner will not make a determination under subsection 177F(1) of the ITAA 1936 to include an additional amount in the assessable income of the rulee. It should be noted at this point that, as stated in Practice Statement Law Administration PS LA 2008/4 which deals with the publication of edited versions of written binding advice, the Commissioner is not bound by an edited version in relation to any taxpayer. An edited version is not: · intended to provide taxpayers with advice or guidance; or · a publication approved in writing by the Commissioner. However, written binding advice that is provided to a taxpayer (from which the edited version is created), is either legally or administratively binding on the Commissioner in accordance with the principles outlined in PS LA 2008/3. That advice is binding only for the taxpayer to whom it applies (paragraph 6 of PS LA 2008/4). In Media release 2004/058, the ATO mentioned a number of re-contribution strategies that will not attract the general anti-avoidance provisions. One of them is that: A person withdraws an eligible termination payment (ETP) from their super fund and then re-contributes the same or a similar amount shortly after to the same fund for the purpose of commencing a superannuation pension. The effect of the strategy is to reduce the assessable portion of the annual pension over the person's retirement years. Based on the information provided, the Commissioner accepts that the proposed re-contribution strategy and its intended consequences are akin to those addressed by that private ruling and media release. | Detailed Reasoning - Conclusion: Having considered the observations you made on the basis of the information provided, the Commissioner concurs with your submission that Part IVA of the ITAA 1936, in particular section 177F, should not apply to the proposed superannuation re-contribution strategy. | Detailed Reasoning - Other relevant comments: Subregulation 1.06(1) of the SIS Regulations, which deals with certain benefits deemed to be a pension, states: A benefit is taken to be a pension for the purposes of the Act if: (a) it is provided under rules of a superannuation fund that: (i) meet the standards of subregulation (9A); and (ii) do not permit the capital supporting the pension to be added to by way of contribution or rollover after the pension has commenced; and (b) in the case of rules to which paragraph (9A)(a) applies - the rules also meet the standards of regulation 1.07D; and … Subregulation 1.06(9A) of the SIS Regulations, which deals with rules for the provision of a benefit, states: Rules for the provision of a benefit (the pension ) meet the standards of this subregulation if the rules ensure that payment of the pension is made at least annually, and also ensure that: (a) for a pension in relation to which there is an account balance attributable to the beneficiary - the total of payments in any year (including under a payment split but excluding amounts rolled over) is at least the amount calculated under clause 1 of Schedule 7; and … When commuting the Taxpayer's existing account-based pension, the individual trustees of the Fund should note the commutation standards under regulation 1.07D of the SIS Regulations, which states that: (1) For paragraphs 1.05(1)(d) and 1.06(1)(b), a benefit meets the standards of this regulation if, under the applicable contract or rules, the annuity or pension cannot be commuted, in whole or in part, except in the following circumstances: (a) the commutation results from the death of the annuitant or pensioner or a reversionary annuitant or reversionary pensioner; or (b) the sole purpose of the commutation is: (i) to pay a superannuation contributions surcharge; or (ii) to give effect to an entitlement of a non-member spouse under a payment split; or (iii) to meet the rights of a client to return a financial product under Division 5 of Part 7.9 of the Corporations Act 2001 ; or (c) for a commutation in part - the account balance of the annuity or pension, immediately after the commutation, is equal to or greater than the minimum payment amount calculated in accordance with Schedule 7 , as reduced by the amount of payments (excluding amounts rolled over) to the annuitant or pensioner already made in the financial year in which the commutation occurs; or (d) the annuity or pension has paid, in the financial year in which the commutation takes place, at least the minimum amount prescribed by subregulation (2). (2) For paragraph (1)(d), the minimum amount is the amount calculated using the formula: Minimum annual amount × where: days in financial year means the number of days in the financial year (365 or 366) in which the commutation takes place. days in payment period means the number of days in the period that: (a) begins on: (i) if the annuity or pension commenced in the financial year in which the commutation is to take place - the commencement day; or (ii) otherwise - 1 July in that financial year; and (b) ends on the day on which the commutation is to take place. minimum annual amount means the minimum amount payable under the annuity or pension, in the financial year, calculated in accordance with Schedule 7.