Private ruling: Valuation of superannuation interest
Published: October 2011
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 October 2011

Ruling: Q1: Does the value of a superannuation interest, immediately before an account-based pension commences, take into account a superannuation fund's deferred tax assets and liabilities in respect of all unrealised losses and gains? | A1: Yes

Relevant facts and circumstances: A self managed superannuation fund (the Fund) has two members, Member A and Member B. Their benefit entitlements amount to 60% and 40% of the value of the Fund's assets, respectively. The superannuation interest of Member A is an accumulation interest. The Fund is a complying superannuation fund. The Fund's assets include cash and ordinary shares in a number of publicly listed companies. In accordance with the terms of its trust deed, and based on the market value of its assets, the Fund recognises deferred tax liabilities when there are unrealised gains on assets and deferred tax assets when there are unrealised losses. It is anticipated that Member A will retire during the 2011-12 income year and will start to receive an account based pension from the Fund. When the Fund's assets are re-valued immediately before the pension commences, the market value of some shares will either exceed or be less than their cost base (or reduced cost base), and a corresponding deferred tax liability or deferred tax asset will be recognised accordingly. From the start date of the pension, there will be a segregation of assets between those set aside to meet the Fund's pension liabilities in respect of Member A and those which remain in the accumulation phase in respect of Member B. The total value of the segregated current pension assets will equal the value of Member A's superannuation interest as calculated immediately before the pension commences. Once the segregation is in place, the Fund will discontinue the recognition of deferred tax liabilities and deferred tax assets in respect of those assets that become segregated current pension assets, as income from such assets will be exempt from income tax under subsection 295-385(4) of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 295-385(4) | Income Tax Assessment Act 1997 Section 307-205 | Income Tax Assessment Act 1997 Paragraph 307-205(b) | Income Tax Assessment Act 1997 Paragraph 307-125(3)(a) | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Regulations 1997 Sub-paragraph 307.205.02(1)(a)(i)

Reasons for decision: Summary: The value of Member A's superannuation interest in the Fund, on the day Member A will commence an account based pension, is the total amount of all the superannuation lump sums that could be payable to Member A from the interest on that day. It represents 60% of the total market value of the Fund's assets, net of the Fund's deferred tax liabilities or deferred tax assets, on that day. | Detailed Reasoning - Detailed reasoning: According to subsection 995-1(1) of the ITAA 1997: superannuation interest means: (a) an interest in a superannuation fund; or (b) an interest in an approved deposit fund; or (c) an RSA; or (d) an interest in a superannuation annuity. Under section 307-205 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. Regulations 307-205.02, 307-205.02A and 307-205.02B of the Income Tax Assessment Regulations 1997 (ITAR) specify methods for determining the value of a superannuation interest in specific situations. However, none of those regulations apply to an account-based pension, which Member A will start to receive. Consequently, paragraph 307-205(b) of the ITAA 1997 applies in determining the value of Member A's superannuation interest. The specific timing for determining the value of a superannuation interest depends on the type of superannuation benefit involved. Subsection 307-125(3) of the ITAA 1997 provides that: For the purposes of subsection (2), determine the value of the superannuation interest, and the amount of each of those components of the interest, at whichever of the following times is applicable: (a) if the superannuation benefit is a superannuation income stream benefit - when the relevant superannuation income stream commenced; (b) if the superannuation benefit is a superannuation lump sum - just before the benefit is paid; (c) despite paragraphs (a) and (b), if the superannuation benefit arises from the commutation of a superannuation income stream - when the relevant superannuation income stream commenced. The trustee of the Fund will determine the value of Member A's superannuation interest on the day Member A's account based pension will commence, pursuant to paragraph 307-125(3)(a) of the ITAA 1997. As the value of Member A's superannuation interest is 'the total amount of all the superannuation lump sums that could be payable from the interest' at the particular time, 60% of the total market value of all the Fund's assets on that day, net of any deferred tax liability and deferred tax asset which the Fund must account for, will be the value of Member A's superannuation interest. The value Member A is entitled to receive on the day the pension commences is the net value for Member A after taking into account the portions of the Fund's deferred tax liability and deferred tax asset that are attributable to Member A's entitlement.

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