Private ruling: Concessional contributions cap - transfers from reserves
Published: February 2014
Ruling period: Income year ending 30 June 2014
Date scheme commenced: During the income year ending 30 June 2014

Ruling: Q1: Where a member of a self-managed superannuation fund (the Fund) commutes a life expectancy fixed term complying pension, will an amount in excess of the commutation value of the pension allocated from a reserve to commence a market linked pension be treated as concessional contributions for the purposes of section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Fund is a complying self-managed superannuation fund. The Fund has one member (the Member). You state that the Member receives two pensions from the Fund: · a life expectancy fixed term pension (the Fixed Term Pension) which, it is stated, complies with subregulation 106(7) of the Superannuation Industry (Supervision) Regulations 1994 (SISR), and · an allocated pension. Both pensions paid to the Member commenced before 20 September 2007. The Fixed Term Pension was funded by using a proportion of the Fund's assets. The Fixed Term Pension expires in a few years. An actuary has indicated that it was highly probable that at that time the balance in the reserve of the Fund backing that pension will be well in excess of the 'best appropriate actuarial value of the pension'. It is proposed that the Fixed Term Pension be fully commuted and the proposed commutation value (as determined by an actuary) be used to commence a market linked pension. The balance (the amount in excess of the commutation value) in the Fund's reserve backing the Fixed Term Pension will be used to fund another market linked pension. Actuarial advice will be obtained prior to the commutation of the Fixed Term Pension.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 291 | Income Tax Assessment Act 1997 Section 291-25 | Income Tax Assessment Act 1997 Subsection 291-25(1) | Income Tax Assessment Act 1997 Subsection 291-25(2) | Income Tax Assessment Act 1997 Subsection 291-25(3) | Income Tax Assessment Regulations 1997 Regulation 292-25.01 | Income Tax Assessment Regulations 1997 Subregulation 292-25.01(4) | Income Tax Assessment Regulations 1997 Paragraph 292-25.01(4)(b) | Income Tax Assessment Regulations 1997 Regulation 995-1.01 | Superannuation Industry (Supervision) Regulations 1994 Subregulation 106(1A) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 106(6) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 106(7)

Reasons for decision: Summary: Where a member of an SMSF commutes a life expectancy fixed term complying pension, any amount in excess of the commutation value of the pension, that is allocated from a reserve to commence a market linked pension, will be treated as concessional contributions for the purposes of section 291-25 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 291-25(1) of the ITAA 1997 provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 291-25(2) of the ITAA 1997 and each amount covered under subsection 291-25(3) of the ITAA 1997. Contributions which are covered by subsection 291-25(2) of the ITAA 1997 are generally contributions made by or for a person to a complying superannuation plan and are included in the assessable income of a superannuation provider. Subsection 291-25(3) of the ITAA 1997 includes in a person's concessional contributions for a financial year an amount in a complying superannuation plan that is allocated for the person for the year in accordance with the conditions specified in the regulations. Provisions in the Act that inserted Division 291 into the ITAA 1997 operate to ensure that the regulations applying to concessional contributions in Division 292 of the ITAA 1997 continue to apply to Division 291. Consequently, regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) sets out these conditions. Generally, an amount that is allocated from a reserve to a member will be a concessional contribution for the member unless it meets the conditions outlined in subregulation 292-25.01(4) of the ITAA 1997 which provide for exceptions to transfers from reserves being considered concessional contributions. Relevantly, paragraph 292-25.01(4)(b) of the ITAR 1997 provides that an amount that is allocated from a reserve will not be treated as concessional contributions if: (i) the amount is allocated from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities (contingent or not), as soon as they become due, in respect of superannuation income stream benefits that are payable by the fund at that time; and (ii) any of the following applies: (A) ... (B) on the commutation of the income stream, except as a result of the death of the primary beneficiary, the amount is allocated to the recipient of the income stream, to commence another income stream, as soon as practicable; … The term 'reserve' is not defined in the ITAR 1997 or the ITAA 1997. Therefore, the meaning of 'reserve' is to be determined by reference to its ordinary meaning and the context in which it is used. The meaning of 'reserve' for the purposes of Division 292 of the ITAA 1997 - the immediate predecessor to Division 291 - is considered by the Commissioner in ATO Interpretative Decision ATO ID 2012/32. The Commissioner has concluded that 'reserve', for the purposes of determining liability for excess contributions tax under Division 292 of the ITAA 1997, includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event. Based on the above, the 'reserve' in this case would be the amount which was set aside to fund the Fixed Term Pension. A 'superannuation income stream' is defined in regulation 995-1.01 of the ITAR 1997 and includes an annuity or pension within the meaning of the Superannuation Industry (Supervision) Act 1993 (SIS Act) which commenced before 20 September 2007. In accordance with subregulation 106(1A) of the SISR, a benefit which commenced before 20 September 2007 is taken to be a pension for the purposes of the SIS Act if it is provided under rules of a superannuation fund that meet the standards of subregulation 106(7) of the SISR. In this case, it is stated that the Fixed Term Pension complies with subregulation 106(7) of the SISR and that it commenced before 20 September 2007. As such, it is taken to be a pension for the purposes of the SIS Act and an income stream for the purposes of paragraph 292-25.01(4)(b) of the ITAR 1997. Therefore, the amount set aside to fund the Fixed Term Pension is considered to be a reserve used solely for the purpose of enabling the Fund to discharge all or part of its liabilities in respect of superannuation income stream benefits that are payable by the Fund at that time. However, subregulation 106(6) of the SISR provides that where, under the rules, a pension can be commuted, the conversion to a lump sum is limited to an amount that is not greater than the sum determined by applying the appropriate pension valuation factor under Schedule 1B of the SISR to the pension as if the commencement day were the day on which the commutation occurs. Therefore, if on the commutation of the Fixed Term Pension, the amount that is allocated from the pension reserve to commence another income stream is less or equal to the commutation value of the pension, the amount will not be treated as concessional contributions for the purposes of section 291-25 of the ITAA 1997. However, any amount allocated from the reserve that is in excess of the commutation value of the pension will be treated as concessional contributions for the purposes of section 291-25 of the ITAA 1997. Based on the above, the transfer from the reserve to commence a market linked pension using the commutation value of the Fixed Term Pension will not be treated as a concessional contribution because the transfer meets the conditions in paragraph 292-25.01(4)(b) of the ITAR 1997. However, the transfer of the balance of the reserve to commence another market linked pension will not meet the conditions in paragraph 292-25.01(4)(b) because it exceeds the commutation value of the Fixed Term Pension. As such, the transfer to purchase the second market linked pension would be treated as a concessional contribution for the purposes of section 291-25 of the ITAA 1997.