Private ruling: Excess non–concessional contributions tax
Published: October 2013
Ruling period: Year ending 30 June 2014
Date scheme commenced: During the income year ending 30 June 2014

Ruling: Q1: Will the proceeds of a life insurance policy held by the trustee of a superannuation fund that is credited to a member's account in the fund so that the fund may pay a superannuation income stream benefit to the member's dependants on the member's death constitute non-concessional contributions for the purposes of section 292-80 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Taxpayer is under 55 years of age and is married with children. The Taxpayer's spouse is also under 55 years of age and the children are under 18 years of age. The Taxpayer is a member of two superannuation funds (Fund A and Fund B). Fund A and Fund B are complying superannuation funds. The trustee of Fund A owns a Life Insurance Policy (Life Policy) in respect of the Taxpayer. Premiums for the policy are paid by Fund A. In the income year ending 30 June 2014, the Taxpayer made a $450,000 non-concessional contribution into Fund B utilising the Taxpayer's full non-concessional contribution cap for the next three years. Also in the income year ending 30 June 2014, the Taxpayer was certified by two medical practitioners (both specialists) as terminally ill and likely to die within 12 months. Consequently, the Taxpayer has an entitlement to a terminal medical condition (TMC) benefit in respect of the Life Policy. Rather than receiving the TMC benefit as a lump sum, the Taxpayer wishes to retain the benefit in Fund A to enable the fund to pay a superannuation death benefit income stream to taxpayer's dependants on taxpayer's death.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 292-80 | Income Tax Assessment Act 1997 Subsection 292-80(1) | Income Tax Assessment Act 1997 Subsection 292-80(2) | Income Tax Assessment Act 1997 Subsection 292-80(3) | Income Tax Assessment Act 1997 Subsection 292-80(4) | Income Tax Assessment Act 1997 Section 292-90 | Income Tax Assessment Act 1997 Subsection 292-90(1) | Income Tax Assessment Act 1997 Subsection 292-90(2) | Income Tax Assessment Act 1997 Division 295-C

Reasons for decision: Summary: Summary The proceeds of the Life Policy held by the trustee of Fund A, that is credited to the member's account in the fund, will not constitute non-concessional contributions for the purposes of section 292-80 of the Income Tax Assessment Act 1997 (ITAA 1997). | Detailed Reasoning - Detailed Reasoning: In accordance with subsection 292-85(1) of the Income Tax Assessment Act 1997 (ITAA 1997), non-concessional contributions made to a complying superannuation fund are subject to an annual cap (known as the non-concessional contributions cap) set out in subsection 292-85(2) of the ITAA 1997. The amount of the excess non-concessional contributions is the amount that exceeds the cap for a financial year. Subsections 292-85(3) and (4) of the ITAA 1997 allow certain individuals to make three years' non-concessional contributions in the one financial year without exceeding their non-concessional contributions cap for the financial year. If an individual exceeds their non-concessional contributions cap for a financial year, the individual is liable to pay excess non-concessional contributions tax on the amount that exceeds the non-concessional contributions cap for the year. The sum of amounts that constitute a person's non-concessional contributions for a financial year are set out in subsection 292-90(1) of the ITAA 1997. These are: (a) each contribution covered under subsection (2); and (aa) each amount covered under subsection (4); and (b) the amount of your excess concessional contributions (if any) for the financial year. With certain exemptions, subsection 292-90(2) of the ITAA 1997 covers contributions that are made to a complying superannuation fund in respect of a person that are not included in the assessable income of a superannuation fund. The term ' contribution ' is not defined in the ITAA 1997, therefore it has its ordinary meaning within the context in which it appears. Taxation Ruling TR 2010/1 explains the Commissioner's views as to the ordinary meaning of the term 'contribution' in so far as it is used in relation to a superannuation fund, approved deposit fund or retirement savings account in the ITAA 1997. At paragraph 4, TR 2010 states: In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general. When discussing a person's purpose, TR 2010/1 states: 132. A person will not normally have the purpose of benefiting a member of the fund if the transaction they carry out is not in any way dependent upon the identity of the other party as a superannuation provider. 133. To illustrate this point, the Commissioner considers that an increase in the fund's capital due to income, profits and gains arising from the use of the fund's existing capital will not, generally, be derived from someone whose purpose is to benefit one or more particular members of the fund. Paragraph 138 of TR 2010/1 comments specifically on the proceeds of an insurance policy and states: An insurance company that pays an amount to a superannuation provider on the occurrence of an insured event under the terms of an insurance policy does so under the terms of the insurance contract. The proceeds of the policy will be treated as income, profit or gain from the use of the fund's existing capital and not as a superannuation contribution. Based on the above, the proceeds of the Life Policy held by the trustee of Fund A which are retained in the fund are not contributions for the purposes of subsection 292-90(2) of the ITAA 1997. However, to determine whether or not the proceeds are, in fact, non-concessional contributions as defined in section 292-90 of the ITAA 1997, consideration must also be given to subsection 292-90(4) of the ITAA 1997 which extends the meaning of non-concessional contributions. In accordance with subsection 292-90(4) of the ITAA 1997, an amount will constitute non-concessional contributions if it is any of the following: a) an amount in a complying superannuation plan that is allocated by the superannuation provider in relation to that plan for you for the year in accordance with conditions specified in the regulations; (b) the amount of any contribution made to that plan in respect of you in the year that is covered by a valid and acknowledged notice under section 290-170, to the extent that it is not allowable as a deduction for the person making the contribution; (c) the sum of each contribution made to that plan in respect of you at a time on or after 10 May 2006 when that plan was not a complying superannuation plan (other than a contribution covered under this paragraph in relation to a previous financial year). As we have already concluded that the proceeds of Life Policy are not contributions it is not necessary to consider paragraphs 292-90(4)(b) and (c) above as they apply to amounts of certain contributions. Therefore, the proceeds will constitute non-concessional contributions only if they fall under paragraph 292-90(4)(a) of the ITAA 1997. The Superannuation Legislation Amendment (Simplification) Act 2007 Explanatory Memorandum explains the application of paragraph 292-90(4)(a) of the ITAA 1997 and states: 1.21 To avoid potential circumvention of the non-concessional contribution cap through the use of reserves, regulations made for the purposes of paragraph 292-90(4)(a) may specify that amounts allocated to a member of a fund are to be included in the non-concessional contributions cap. [Schedule 3, items 17 and 18, paragraphs 292-90(1)(aa) and 292-90(4)(a) of the ITAA 1997] In the current circumstances, the proceeds of the Life Policy are not paid from the fund's reserve based on the facts described above. As such, they do not constitute non-concessional contributions for the purposes of subsection 292-90(4) of the ITAA 1997. Therefore, the proceeds from the Life Policy are not non-concessional contributions for the purposes of section 292-90 of the ITAA 1997.