Private ruling: Superannuation benefits - in specie payment
Date of advice: 4 July 2017
Published: November 2017
Ruling period: Income year ended 30 June 2017 | Income year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: If a member of the Fund partially commutes their account-based pensions in exchange for lump sum benefits paid by way of an in specie transfer of assets, will the capital gain realised by the Fund on the disposal of those assets be disregarded under section 118-320 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Fund is a complying self-managed superannuation fund within the meaning of section 45 of the Superannuation Industry (Superannuation) Act 1993 (SISA). A member of the Fund (the Member) receives a number of account-based pensions (the Pensions) that comply with subregulation 1.06(9A) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Each pension is comprised solely of unpreserved money. To enable the Fund to discharge part of the Fund’s liabilities in respect of the Pensions, the trustee of the Fund (the Trustee) has set aside certain unlisted shares and unlisted units in a unit trust (the Segregated Pension Assets). The remainder of the Fund’s liabilities in respect of the Pensions are funded from a 'general pool’ of assets held for the payment of benefits to other Fund members with accumulation accounts (the Segregated Non-pension Assets). The Member intends to partially commute a number of the Pensions in exchange for a lump sum payment. Each lump sum payment will be paid to the Member in specie solely from the Segregated Pension Assets. Both the private company and the unlisted unit trust are 'controlled’ by the members of the Fund and their related parties. As such, each of these investments is considered to be an 'in-house asset’ of the Fund as defined in section 71 of the SISA. At 30 June 2016, the Trustee estimated the value of the in-house assets to have exceeded the level permitted by section 82 of the SISA. Consequently, the Trustee is required to put in place a written plan to remove the excess amount by 30 June 2017. The Trustee proposes to remove the excess amount by removing the actual assets from the Fund at the current market value. The unlisted shares and units will be independently valued by an independent valuer. The amount of the commutation will be equal to the market value of the unlisted shares and units. You state that the reason for the payment in specie is that there is not a ready market for the relevant assets; they are required to be removed as a result of section 82 of the SISA and the members of the Fund do not have sufficient cash to acquire the assets from the Fund, therefore the only means of removing the excess is by way of an in specie transfer at market value.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 section 118-320 | Income Tax Assessment Act 1997 section 295-385 | Income Tax Assessment Act 1997 subsection 295-385(4) | Income Tax Assessment Act 1997 subsection 295-385(6) | Income Tax Assessment Regulations 1997 regulation 295 385.01 | Income Tax Assessment Regulations 1997 regulation 995-1.03 | Superannuation Industry (Superannuation) Act 1993 section 45 | Superannuation Industry (Superannuation) Act 1993 section 71 | Superannuation Industry (Superannuation) Act 1993 section 82 | Superannuation Industry (Supervision) Regulations 1994 subregulation 1.06(9A) | Superannuation Industry (Supervision) Regulations 1994 Part 6 | Superannuation Industry (Supervision) Regulations 1994 subregulation 6.01(2)

Reasons for decision: Summary: Any capital gain (or loss) that the Fund makes as a result of the in specie payment on partial commutation of the Pensions may be disregarded when working out the net capital gain (if any) of the Fund for the relevant income year. | Detailed Reasoning - Partial commutation – in specie payment: Taxation Ruling TR 2013/5 Income tax: when a superannuation income stream commences and ceases (TR 2013/5) sets out the Commissioner’s views as to what a partial commutation is, when a partial commutation of an account-based pension is taken to have been made and some of the implications of a partial commutation for a member being paid an account-based pension from their superannuation fund. Essentially, the Commissioner considers that: a) A member partially commutes their pension if they consciously and validly exercise their right to exchange something less than their full entitlement to receive future payments under the pension for an entitlement to be paid a lump sum (paragraph 119 of TR 2013/5). b) The payment made to the member following a full commutation of a superannuation income stream is a superannuation lump sum for income tax purposes as the superannuation interest no longer supports a superannuation income stream at the time the payment is made (paragraph 26 of TR 2013/5). c) A superannuation income stream does not cease when a member partially commutes some of their entitlements to future superannuation income stream benefits for an entitlement to a lump sum (paragraph 27 TR 2013/5) d) If the election under regulation 995-1.03 of the Income Tax Assessment Regulations 1997 (ITAR 1997) is not made, the payment resulting from the partial commutation is a superannuation income stream benefit for income tax purposes (paragraph 28 of TR 2013/5). In paragraph 15 of Self-Managed Superannuation Funds Determination SMSFD 2013/2 Self-Managed Superannuation Funds: does a payment made as a result of a commutation of an account based pension count towards the minimum annual amount required to be paid under paragraph 1.06(9A)(a) of the Superannuation Industry (Supervision) Regulations 1994? (SMSFD 2013/2), the Commissioner states that a payment made as a result of the partial commutation of an account-based pension is a lump sum for the purposes of the SISR and acknowledges that such a lump sum payment from a pension account can be paid in specie . This reflects the definition of 'lump sum’ in subregulation 6.01(2) of the SISR which includes an 'asset’ for the purposes of the payment standards in Part 6 of the SISR. Based on the above, only a payment made as a result of a partial commutation of the account-based pensions can be paid in specie from the pension accounts while the pensions remain payable. If the Member is not able to partially commute their pensions, or do not validly partially commute their pensions, an in specie payment cannot be made from the pensions while they remain payable. | Detailed Reasoning - Capital gains and losses - segregated current pension assets: In accordance with section 104-10 of the ITAA 1997, a partial commutation in specie, that is, the transfer of units and shares form the Fund to the Member, will constitute a Capital Gains Tax (CGT) event A1. However, section 118-320 of the ITAA 1997 provides that a capital gain (or capital loss) that a complying superannuation fund makes from a CGT event happening in relation to a 'segregated current pension asset’ is disregarded. Relevantly, subsection 295-385 (4) of the ITAA 1997 states that assets are 'segregated current pension assets’ of the fund at a time if the assets are invested, held in reserve or otherwise being dealt with at that time for the sole purpose of enabling the fund to discharge all or part of its liabilities (contingent or not) as they become due, in respect of superannuation income stream benefits that: a) are payable by the fund at the time; and b) are prescribed by the regulations for the purposes of section 295-385 of the ITAA 1997. Regulation 295-385.01 of the ITAR 1997 lists superannuation income stream benefits that are prescribed for the purposes of section 295-385 of the ITAA 1997 and includes an account-based pension within the meaning of the SISR. You have stated that the particular shares and units that will be transferred to the Member as payment of the partial commutation amount are segregated current pension assets. We have assumed that you mean they will be segregated current pension assets at all times during the income year up to their transfer to the Member. Accordingly, in accordance with section 118-320 of ITAA 1997, any capital gain (or loss) that the Fund makes as a result of the in specie payment on partial commutation of the Pensions may be disregarded when working out the net capital gain (if any) of the Fund for the relevant income year. However, from the point in time immediately after the in specie payment is made, the Member’s pension account balances must be reduced by the value of the assets that were paid in specie and the value of the segregated current pension assets supporting the pensions must be reduced accordingly. It should be noted that subsection 295-385(6) of the ITAA 1997 applies, both before and after the in specie payment is made, to ensure that those assets of the Fund that are supposed to be supporting a member’s account-based pension will not be taken to be segregated current pension assets, to the extent that the market value of those assets exceeds the member’s current pension account balance at any time.