Private ruling: Roll-over of superannuation benefit
Published: April 2013
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Is the payment made by an employer superannuation scheme (the Scheme) to your client a roll-over superannuation benefit for the purposes of section 306-10 of the Income Tax Assessment Act 1997? | A1: No.

Relevant facts and circumstances: Your client was a member of an employer superannuation scheme (the Scheme). In the relevant income year your client ceased employment with the Employer. Before terminating employment, your client had meetings with a financial advisor (the Advisor) and the advice provided was for your client to roll-over their benefit in the Scheme to a superannuation product. After your client terminated employment, the Scheme sent your client a letter stating the amount of your client's benefit in the Scheme and the preservation status of the benefit. In the letter your client was also provided with the following information: (a) if your client retired permanently from the workforce your client could change the benefit to non-preserved and to do this your client would need to sign and return a declaration (the Decalaration). (b) preserved benefits must be rolled over to a complying rollover fund (i.e. another superannuation fund, approved deposit fund, or deferred annuity) where it must remain until your client's preservation age and your client retired permanently from the workforce. (c) the break-up of your client's benefit for tax purposes. (d) if your client wanted help to understand the tax issues relating to the benefit, it may be worth getting advice from an appropriately qualified adviser. (e) a number of options available to help your client decide what to do with the superannuation benefit. (f) a checklist to help your client in relation to the steps to be undertaken after deciding what your client wanted to do with the benefit. In the letter it was also stated if your client did not return a completed form (Direction Form) to the Scheme by a specified date as to how and where to pay your client's benefit, the Scheme would transfer the total of your client's benefit to a roll-over fund (RF) nominated by the Scheme. In relation to the RF the Scheme also stated: · your client's benefit would automatically be transferred to the RF if the Direction Form was not provided to the Scheme within a specified period of time; · on transfer of benefits to the RF your client would cease to be a member of the Scheme; and · any benefits transferred to an RF could subsequently be transferred to another approved fund, or subject to preservation requirements, be paid to your client. Your client deliberately did not fill out the Direction Form as your client wanted the benefit in the Scheme to be rolled-over into the RF. After some time had elapsed, and your client determined from the Advisor the superannuation benefit had not been transferred to the RF as at that date, your client contacted the Scheme. Your client was not satisfied with the Scheme's explanation as to why the roll-over had not yet occurred and subsequently provided the Scheme with: (a) a completed Direction Form for the immediate payment of the benefit from the Scheme to an account nominated) by your client (an account which was held in your client's name); and (b) a Declaration. Your client did not seek any advice from the Advisor or any other relevantly qualified professional prior to or during the lodgement of the Direction Form with the Scheme. The Scheme, subsequent to conversations held with your client and your client providing the Scheme with a Direction Form, Declaration and additional information, transferred your client's benefit in the Scheme to the nominated account, i.e. an account which was held in your client's name. In the period prior to the transfer, the Scheme asked your client whether your client would like the benefit to go to the ER to which your client said no. At the time your client's benefit was transferred from the Scheme to the nominated account the Scheme provided your client with a letter (the Letter) which stated: · the amount of the benefit payment from the Scheme; · how the benefit was calculated; and · the entire benefit, that is, after tax, was deposited into your client's nominated account. The Letter also included a 'PAYG payment summary - superannuation lump sum' which shows the payment was made in the relevant income year; the components of the payment and tax withheld. On the same day that the benefit was made to the nominated account, your client transferred the payment into another account (Account 1) which was also held in your client's name. Your client states becoming aware of the tax payable on the transfer after the transfer was made and subsequently engaged the services of an accountant (the Accountant). The Accountant entered into communication with the Scheme on various dates to mainly determine whether: (a) the funds placed by the client into Account 1 could be treated as funds to a superannuation savings account; and (b) the Scheme could amend the paperwork to treat the benefit as a roll-over to another superannuation fund. A regulated superannuation fund (the Fund) was established with the client and a family member as its trustees and members. Approximately one month after the Fund was established, Account 1 was closed and its balance was transferred to Account 2, an account which is held in the Fund's name. The statements for the Accounts into which the benefits were transferred have been provided. As a result of a review the Scheme informed the Accountant that the payment from the Scheme could not be treated as a roll-over taking into account: (a) the Scheme received a Direction form from the client for the benefit to be paid into a account nominated by your client which was in your client's name; (b) the client confirmed in a letter that the payment be made to the nominated account; (c) a response the Scheme provided the Accountant on an earlier occasion that a benefit payment made by the Scheme to a personal account that is not a payment to a retirement savings account or other qualifying vehicle and cannot subsequently be changed. (d) the details of the Account relating to the Fund which were provided Accountant were not the same as those the client provided on the Direction Form. Subsequent to the review your client lodged a formal complaint with the Scheme to which the Scheme stated, amongst other matters: (a) The Scheme's letter did not state that your client's benefit would be transferred to the RF on a particular date if it did not receive a Direction Form. (b) The Scheme does not transfer members' benefits to the RF on a daily basis (c) When your client contacted the Scheme (after your client had spoken to the Advisor), the Scheme had not finalised the transfer of your client's benefit to the RF and: (i) your client's benefit was still with the Scheme; and (ii) your client specifically requested the Scheme not to transfer the benefit to the EF. (d) In one of the Scheme's letters, your client was advised, that neither the Scheme, or the Employer could give your client advice about benefit payment options and suggested your client seek advice from a qualified financial adviser. (e) In conclusion, the Scheme considered that tax was correctly withheld from the superannuation benefit payment. Your client was less than 60 years of age when the benefit was paid.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 306 | Income Tax Assessment Act 1997 Section 306-5 | Income Tax Assessment Act 1997 Section 306-10 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Act Regulations 1997 Regulation 306-10.01 | Superannuation Industry (Supervision) Act 1993 Section 10 | Superannuation Industry (Supervision) Act 1993 Section 42A | Superannuation Industry (Supervision) Act 1993 Section 47 | Retirement Savings Accounts Act 1997 Section 8

Reasons for decision: Summary: The payment of your client's lump sum superannuation benefits from the employer superannuation scheme is not a roll-over of superannuation benefits as the payment was not made to a complying superannuation plan but directly to your client. | Detailed Reasoning - Detailed reasoning: Division 306 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the tax treatment of payments made from one superannuation plan to another superannuation plan and of similar payments. Section 306-10 of the ITAA 1997 states: A superannuation benefit is a roll-over superannuation benefit if: (a) the benefit is a superannuation lump sum and a superannuation member benefit; and (b) the benefit is not a superannuation benefit of a kind specified in the regulations; and (c) the benefit satisfies any of the following conditions: (i) it is paid from a complying superannuation plan; … and (d) the benefit satisfies any of the following conditions: (i) it is paid to a complying superannuation plan ; … (emphasis added) In your client's case the facts show paragraphs 306-10(a),(b) and (c) are satisfied as: (a) a superannuation lump sum payment was made in relation to your client as your client was a member of a superannuation fund, that is, the Scheme; (b) the benefit, that is, the superannuation lump sum payment, is not of a kind specified in the regulations (Regulation 306-10.01 of the Income Tax Assessment Act Regulations 1997); and (c) the Scheme is a complying superannuation plan. In view of the above, subparagraph 306-10(d)(i) of the ITAA 1997 is the only remaining relevant condition to determine whether the superannuation lump sum payment ( the Payment ) made by the Scheme directly to your client's account in the relevant income year is a roll-over superannuation benefit. Accordingly, it must be demonstrated that the Payment was ' paid to a complying superannuation plan' and in your client's case, as indicated by the facts, whether that plan was a complying superannuation fund . | Detailed Reasoning - Complying superannuation fund: Subsection 995-1(1) of the ITAA 1997 states a: complying superannuation fund means a complying superannuation fund within the meaning of section 45 of the Superannuation Industry (Supervision) Act 1993 Further to the meaning of a complying superannuation fund in section 45 of the SISA, it should also be noted that under section 42A a self-managed superannuation fund is a complying superannuation fund when the entity is a resident regulated superannuation fund and does not contravene one or more of the regulatory provisions after the Regulator (that is, the Commissioner of Taxation) takes into account various matters (subsections 42(1A) and 42A(5) of the SISA). In relation to regulatory provisions this includes, but is not limited to, that: · A trust has been set up; · A trust deed has been created; · There is an investment strategy in relation to the fund; and · Annual returns for the fund in the approved form are lodged with the regulator. | Detailed Reasoning - Superannuation fund: In relation to what constitutes a superannuation fund, subsection 995-1(1) of the ITAA 1997 states it has the meaning given by section 10 of the SISA, that is: superannuation fund means: (a) a fund that: (i) is an indefinitely continuing fund; and (ii) is a provident, benefit, superannuation or retirement fund ; or (b) a public sector superannuation scheme. (emphasis added) In the Full High Court decision Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 ( Mahony ) Justice Kitto considered the expression 'provident, benefit or superannuation fund'. In Mahony , Justice Kitto referred to each of the three terms in the expression separately in his judgment. Justice Kitto said: the meaning of the several expressions must, therefore, be arrived at in the light of ordinary usage and with only one piece of assistance to be gathered from the immediate context. Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words "provident", "benefit" and "superannuation" must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees. Justice Kitto went on to state: First, the trustees were required to pay to or for the benefit of any employee, or to a dependant of his, such sum as the employer might direct; but the direction might be given not only because of some misfortune, but "for any other reason whatsoever", so that the fund was not, because of the provision for these payments, a fund of any of the three special descriptions . Secondly, under provisions in the deed for the winding up of the fund, an equal distribution among the employees of the employer was required if, as was the fact at all material times, there was no member. This again, if it should take effect, would yield a benefit to the employees, but not a benefit of any such special character that the fund could properly be described, on that account, as a "provident", "benefit" or "superannuation fund". (emphasis added) Justice Kitto held that the fund had to exclusively be a provident, benefit or superannuation fund and that inferred a purpose narrower than the purpose of conferring benefits in a completely general sense. This narrower purpose meant that the benefits had to be characterised by some specific future purpose such as the example given by Justice Kitto of a funeral benefit. Justice Taylor also ruled that the fund had to be established exclusively for the purposes set out in the legislation. The view that a superannuation fund should be established for the sole purpose of providing superannuation benefits on retirement is also supported in the High Court decision Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v. Federal Commissioner of Taxation (No 2) (1966) 40 ALJR 265; (1966) 14 ATD 333; [1966] LB Co's Tax Serv 80; (1966) 10 AITR 290 (Scott) . Justice Windeyer said: ... there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. Accordingly, the Commissioner of Taxation's view is that a fund, to be classified as a superannuation fund, must exclusively provide a narrow range of benefits that are characterised by some specific future purpose, that is, the payment of superannuation benefits upon retirement or death of the individual or as specified under the SIS legislation. | Detailed Reasoning - Payment from the Scheme: Prior to your client's termination of employment, and as a result of advice provided to your client from meetings with a financial advisor (the Advisor), it is noted your client intended the Payment to be rolled-over from the Scheme into a superannuation product . Your client's intention to roll-over the benefits is also supported by your client's initial decision not to provide the Scheme with a Direction Form. As shown in the facts, the Scheme's Trustee advised your client that if it did not receive a completed Direction Form by a specified date, your client's total benefit would be transferred to the Scheme's Rollover Fund ( RF ). Despite the above, your client's intentions for a roll-over of the superannuation benefits to either the RF or an alternative superannuation product changed as shown in the following: (a) Subsequent to contacting the Advisor and not being satisfied with the Scheme representative's explanation why the benefits had not yet been rolled-over to the RF, your client decided to provide the Scheme with: (i) a completed Direction Form for the immediate payment of the benefit from the Scheme, by way of a transfer, to an account which was held in your client's name ( the nominated account ); and (ii) a Declaration. (b) In a conversation held between your client and a Scheme representative, your client stated the benefit was not to be transferred to the RF. (c) Your client provided the Scheme with documentation which reconfirmed the direction that your client's benefits in the Scheme be deposited into the nominated account. (d) In accordance with your client's directions, the Payment was made from the Scheme to the nominated account. In view of the above, your client's actions from the time of the last conversation with the Advisor until the Payment was made to the nominated account show that: (a) your client, though afforded the opportunity on several occasions to roll-over the benefits to the RF, did not want the benefits from the Scheme to be rolled-over to the RF; and (b) your client did not request the benefits from the Scheme to be paid to an alternative superannuation product (as was discussed in your client's meetings with the Advisor leading up to your client's termination of employment). In accordance with your client's instructions the Scheme made the Payment to the account nominated by your client, in this case, an account which was held in your client's name. From the earlier discussion on what constitutes a complying superannuation fund, it is obvious that your client's nominated account is not a complying superannuation fund as it does not possess the characteristics of a superannuation fund nor is it a regulated fund. Further, the nominated account is neither an approved deposit fund (ADF) or a retirement savings account (RSA) as defined in section 47 of the SISA and section 8 of the Retirement Savings Accounts Act 1997 respectively. Accordingly, the Payment made from the Scheme does not satisfy subparagraph 306-10(d)(i) of the ITAA 1997 as the nominated account is not a complying superannuation plan . It is noted that you make reference to the case Player v. Federal Commissioner of Taxation [2011] FCA 869, 2011 FCA 20-271; [2012] ALMD 3670; [2012] ALMD 4068 ( Player's Case ) as support that the Payment is a roll-over of superannuation benefits. Player's Case, an appeal case relating to the Administrative Appeals Tribunal decision in [2011] AATA 35; (2011) 2011 ATC 10-171; [2012] ALMD 3669; (2011) 82 ATR 184, commented on the issue of whether section 306-10 of the ITAA 1997 would be satisfied if a superannuation benefit was not directly paid into a complying superannuation fund. In Player's Case , a $355,000 superannuation benefit from a complying superannuation fund, which was paid by cheque, was deposited into the taxpayer's bank account whereupon the taxpayer immediately purchased a bank cheque for $355,000 in favour of another complying superannuation fund which accordingly banked the cheque. The taxpayer did not choose to exercise the roll-over election available to her as the recipient of an ETP but included the taxable amount of the ETP as assessable income in her income tax return for the relevant income year. Subsequent to an assessment being made for the relevant year, and an excessive contributions notice being made, one of the issues the taxpayer raised was that the $355,000 transaction was a roll-over. In deciding Player's Case , Justice Edmonds, at paragraph 17, agreed with the Administrative Appeals Tribunal (AAT) by stating: …The Tribunal at [30] of its reasons seriously questioned the Commissioner's contention that the requirements of s 360-10 will be satisfied only if a payment is made directly by a complying superannuation plan to a complying superannuation plan; so that if the amount is first deposited to a different account before being on-paid the requirements of the section will not be satisfied. The Tribunal said: 'The Respondent contends that the requirements of section 306-10 will be satisfied only if a payment is made directly by a complying superannuation plan to a complying superannuation plan and so if that amount is first deposited to a different account before being on-paid the requirements of the section will not be satisfied. I am by no means sure that so technical a meaning of the section is correct but it is not necessary for me, for the purposes of this decision, to come to a firm conclusion to as to this issue. I would have thought that it could be argued that where (by way of example) a superannuation plan pays money into a solicitor's trust account with a direction that the amount be on-paid to a superannuation plan the legislative provisions might be said to be satisfied ." (emphasis added) I totally agree with this observation. Further at paragraphs 22 and 23 in Player's Case, Justice Edmonds stated: 22. So understood, there is one ground of the amended notice of appeal which raises a question of law grounded in the Tribunal's reasons, and that is ground 5.1A: '5.1A The Tribunal erred in law in not finding that if she [the taxpayer] did obtain a beneficial interest it did not prevent it from finding the $355,000 was a roll-over superannuation benefit within s.306-10 of the ITAA 97'. That ground raises a question of law grounded in the Tribunal's reasons at [28] where the Tribunal said: 'If she received it both legally and beneficially section 306-10 cannot apply.' 23. In my view, the Tribunal was correct in so concluding and, in consequence, its reasons for decision disclose no error of law. The above case, in obiter dictum comments, suggests that a payment which is not made directly from one complying plan to another may still satisfy subparagraph 306-10(d)(i) of the ITAA 1997 in situations where the payment, as a result of an external direction, such as a court order, is paid into a solicitor's trust account and that amount is on-paid into a complying superannuation plan. However, it is clear from the decisions made by both the AAT and the Federal Court that where a person has both a legal and beneficial interest in the superannuation benefits, section 306-10 of the ITAA 1997 will not apply. In your client's case the facts show there were no external directions for the benefits to be on-paid and that: (a) the Payment made to the nominated account was in accordance with your client's instructions as shown by: (i) conversations your client had with the Scheme; and (ii) the Direction Form and Declaration your client provided the Scheme. In relation to the Declaration, as the client was advised in a letter from the Scheme, its completion gave your client the option to change your client's entire benefit from 'preserved' to 'non-preserved'. Further, as indicated in the letter, by changing the benefits status from preserved to non-preserved this would mean that your client's benefits would not necessarily have to be rolled-over i.e. your client could have access to the benefits to deal with as your client wished. (b) the Payment being withdrawn from Account 1 and deposited into an Account in the name of your client's SMSF (Account 2) does not represent superannuation benefits from the Scheme being on-paid to a complying superannuation plan. The above transfer is a separate action to that of the Payment made by the Scheme. As shown by the facts, the transfer of the Payment amount from Account 1 to Account 2 was only made after: (i) your client became aware, after the Payment was made, of the tax consequences of the instructions your client gave to the Scheme; and (ii) your client having engaged the services of the Accountant which led to the establishment of the client's SMSF. Notwithstanding the above, it should also be noted that in paragraph 22 in Player's Case it was stated that section 306-10 of the ITAA 1997 could not apply if the taxpayer legally and beneficially received the superannuation benefits. In your client's case, when the Payment was made by the Scheme to the nominated account it was not held in that account for the legal and beneficial interest of the SMSF as: (a) the SMSF only came into existence more than a month after the Payment was made to the nominated account; and (b) as previously discussed, the decision to create a SMSF was made after the Payment was made and your client became aware of the tax consequences which resulted from the instructions your client had given to the Scheme. In view of the above and taking into consideration: (a) the Payment was made to an Account held in your client's name; and (b) the directions your client provided to the Scheme, included a Declaration, which gave your client the option to change the entire benefit from 'preserved' to 'non-preserved' and hence give your client access to the benefits; it is considered that your client was the legal and beneficial owner of the Payment and in view of paragraph 22 in Player's Case , the Payment would not be viewed as a roll-over of superannuation benefits for the purposes of section 306-10 of the ITAA 1997. | Detailed Reasoning - Conclusion:: In view of the above, subparagraph 306-10(d)(i) of the ITAA 1997 has not been satisfied as your client's superannuation benefits in the Scheme were paid to your client and not into a complying superannuation plan. Accordingly, the payment of your client's superannuation benefits which were made by the Scheme to your client is not a roll-over of superannuation benefits for the purposes of section 306-10 of the ITAA 1997. | Detailed Reasoning - Further issues for you to consider: It should be noted that the transfer of monies from Account 1, which was held in your client's name, into your client's superannuation fund would represent superannuation contributions to that Fund. A taxpayer can make non-concessional contributions to a superannuation fund for a financial year up to a particular limit, known as the 'non-concessional contributions cap'. 'Non-concessional contributions' are, broadly, amounts that have not been included in the assessable income of a superannuation plan. Section 292-85(1) of the ITAA 1997 provides that a taxpayer will have 'excess concessional contributions' for a financial year if the amount of his or her 'non-concessional contributions' for the year exceeds the 'non-concessional contributions cap' for that year. The amount of the excess concessional contributions is the amount by which the non-concessional contributions exceed the cap. Any non-concessional contributions over the cap is taxed at the rate of 46.5% (subsection 292-80 of the ITAA 1997 and sections 4 and 5 of the Superannuation (Excess Non-concessional Contributions Tax) Act 2006 ).