Private ruling: Defined benefit interests
Published: May 2014

Ruling: Q2: If the answer to question one is 'yes' would these interests satisfy requirements of the transitional rules for notional taxed contributions under section 291-170 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997)? Advice Not necessary to answer

Relevant facts and circumstances: During the quarter ended 30 March 2014 we received your request for administratively binding advice, which included copies of the: • Consolidated Deed during quarter ended [certain date] • Deed of Guarantee during quarter ended [certain date] • Superannuation Fund Private Ruling Application - Appendix A Relevant extracts C onsolidated Deed during quarter ended [certain date] - general definitions • Sub-subclause 2.2(1) Accumulation Account means the account established on behalf of each Member pursuant to clause 7.1 • Sub-subclause 2.2(59) SGC means the Superannuation Guarantee Charge Act 1992 , the Superannuation Guarantee (Administration) Act 1992 and the Superannuation Guarantee (Administration) Regulations as the context requires • Sub-subclause 2.2(60) Shortfall Component has the same meaning as in the SGC C onsolidated Deed [certain date]- Category S Members • Sub-subclause 1.2(5) Deed of Guarantee means the Deed of Guarantee executed by the Employer in favour of the Transferred Members. • Sub-subclause 1.2(7) SG Benefit means the amount determined by the Principal and approved by the Trustee as being sufficient to ensure that the Employer does not incur a charge under the Superannuation Guarantee (Administration) Act 1992 in respect of Category S Member, taking into account the benefits provided to or in respect of that Member from the Fund other than pursuant to these Rules (if any) and from any other superannuation fund to which the Employer contributes or has contributed in respect of that Member. • Sub-subclause 1.2(8) Transfer Date means 30 June xxxx or any later date agreed to by the Employer and Trustee. • Sub-subclause 1.2(9) Transfer Members means those members who elected to transfer at the Transfer Date into Category S from Categories B, C and D and have the level of their benefits guaranteed by the Deed of Guarantee. • Subclause 3.2 states that the Employer must make such contributions in respect to the Transferred Members that will satisfy the Employer's obligations under the SGC and as required by the Trustee to pay benefit for Transferred Members in accordance with the Deed of Guarantee. • Subclause 3.3 states that the Employer must make such contributions in respect to Category S member that are not Transferred Members that will satisfy the Employer's obligations under the SGC. Deed of Guarantee • Recital B. states that the Transferring Members are members of the Fund in Categories B,C, and D, under which benefits may become payable to or in respect of them in certain circumstances including retirement, disablement, retirement, leaving services and death. • Recital C. states that the Employer has agreed with each Transferring Member that as from the Transfer Date the Employer will reclassify the Transferring Members as a Category S member of the Fund. The effect of the Trust Deed is that as from the Transfer Date the benefits payable out of the Fund to or in respect of each Transferring Member will be calculated under Category S of the Trust Deed instead of Category B, C or D. • Subclause 1.1 of the Deed of Guarantee interprets the following terms as follows: "Default Accumulation Benefit" means the aggregate of: (a) the gross amount of the benefit that would be payable out of the Fund in respect of the Transferring Member (excluding the Excluded Component) if earning rate applies to his or her accounts in the Fund from the Transfer Date to the relevant date had been rate applicable to the Fund's Default Investment Portfolio (from time to time) rather than the investment strategy nominated by the Transferring Member from time to time; and (b) the amount of any benefit that has been transferred out of the Fund at the request of the Transferring Member after the Transfer Date. "Defined Benefit" means the gross amount that would have been payable out of the Fund in respect of the Transferring Members on the relevant date had he or she remained a member of Category B, C or D of the Fund on the terms applying in the Trust Deed on the Transfer Date. "Excluded Component" means the aggregate of: (a) that part of a benefit attributable to voluntary member contributions made by a Transferring Member after the Transfer Date; and (b) any salary sacrifice contributions made in respect of a Transferring Member after the Transfer Date. "Insurance Shortfall" means: (a) the amount of the insured component of the benefit that would have become payable in respect of the Transferring Member in the event of the member's death or total and permanent disablement if the member has not transferred to Category S with effect on the Transfer Date pursuant to the terms of the Trust Deed in effect on the Transfer Date; less (b) the amount of the insured component of the benefit that becomes payable in respect of the Transferring Member as a consequence of the member's death or the member suffering total and permanent disablement (as the case may be). "Shortfall" means the amount that, when contributed to the Fund and after allowing for any tax payable in respect of the contributions, will equal the amount by which the Defined Benefit exceeds the Default Accumulation Benefit. "Transfer Date" means 30 June xxxx . "Transferring Member" means a member of Category B, C or D of the Fund as at the Transfer Date who, before the Transfer Date, gave to the employer a properly executed consent in the form set out in this schedule. • Clause 2 titled "Employer's Obligations" states that: (a) If, when a benefit becomes payable from the Fund to or in respect of a Transferring Member the Transferring Member's Defined Benefit is greater than the Default Accumulation Benefit, Employer shall contribute to the Fund for the benefit of the Transferring Member the amount of the Shortfall. • Since the Transfer Date, the Fund administered and reported the interests of the Transfer Members as accumulation interests. Taxpayer's contentions In your application you have provided the following contentions: • the interests of the Transfer Members held within the Fund's Category S had been incorrectly classified as accumulation interests • the arrangement between the Employer and the Transfer Members, including the application of the Deed of Guarantee over the level of benefits payable in respect of Transfer Members, is recognised within the Trust Deed of the Fund • the requirement for the Employer to contribute to the Fund to meet the funding requirements associated with Transfer Members' benefits is mandated within the Trust Deed of the Fund • where a shortfall exists between a Transfer Member's Defined Benefit and their Default Accumulation Benefit, the benefit payment for that Transfer Member will include a component calculated in accordance with the arrangements applicable to Categories B, C and D of the Fund and, as such, it is reasonable to conclude that these members' superannuation interests meet the definition of "defined benefit interest" contained within the Income Tax Assessment Act 1997 • the comparison between a Transfer Member's Defined Benefit and Default Accumulation Benefit upon payment of a benefit is made based on the default investment option of the Fund and the Transfer Member is not able to influence the amount of the shortfall • the Employer recognises that it has a potential ongoing liability to fund defined benefits for the Transfer Members and receives actuarial advice in relation to this liability • the arrangement to classify the Transfer Members within the Fund and report these as accumulation members was entered into primarily for reasons of administrative efficiency. Your contentions have been taken into consideration. Please refer to the 'Reasons for decision'.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 291-175 | Income Tax (Transitional Provisions) Act 1997 section 291-170

Reasons for decision: Summary: The interests held by the Transfer Members after the Transfer Date are not defined benefit interests as the Transfer Members' entitlement to superannuation benefits payable from the interests are not defined by reference to any of the factors listed in subsection 291-175(1) of the ITAA 1997. As the interests held by the Transfer Members after the Transfer Date, were determined to be accumulation interests response to question 2 is no longer required. | Detailed Reasoning - Detailed reasoning: Defined benefit interest Previous subsection 292-175(1) and current subsection 291-175(1) of the ITAA 1997 states that: An individual's superannuation interest is a defined benefit interest to the extent that it defines the individual's entitlement to superannuation benefit payable from the interest by reference to one or more of the following matters: (a) the individual's salary, or allowances in the nature of salary, at particular date or averaged over a period; (b) another individual's salary, or allowance in the nature of salary, at a particular date or averaged over a period; (c) a specified amount (d) specified conversion factors Accordingly, a superannuation interest will only be defined benefit interest where the individual's entitlement to a superannuation benefit payable from that interest is defined in some way by reference to particular calculation that will be undertaken at a particular date or averaged over a period. Application to your circumstances The Transfer Members' entitlement to a superannuation benefit payable from their Category S superannuation interest is defined by the sum of the contributions made to that interest and the net earnings accrued. Rather than the Transfer Members' entitlement to a superannuation benefit being defined by any of the relevant factors in subsection 292-175(1) of the ITAA 1997, their entitlement to the employer making an additional contribution at the time a benefit becomes payable (and if so, the amount of that contribution) is determined with reference to the relevant factors. However, an interest is not a defined benefit interest if a contribution is worked out by reference to one or more of the relevant factors. It requires that the actual superannuation benefit payable itself be worked out by reference to one or more of the relevant factors. The Fund's trust deed requires the Employer to make contributions for the benefit of the Transfer Members as required under the SGC and the Deed of Guarantee. The Trustee must determine if a Shortfall contribution is payable and if so the amount of the contribution and the member has an entitlement to be paid a benefit which includes the Shortfall contribution if it is payable. However, this does not alter that the benefit itself is based on the contributions and net earnings actually accrued and is not itself determined by reference to any of the relevant factors. | Detailed Reasoning - Conclusion: The interests held by the Transfer Members after the Transfer Date, are accumulation interests as they do not meet requirements imposed under subsection 291-175(1) of the ITAA 1997. As the interests held by the Transfer Members after the Transfer Date are not defined benefit interests there is no need to answer question 2.

Question 1: Are the interests of the Transfer Members held within the Superannuation Fund after the Transfer Date defined benefit interests as defined under section 291-175 of the Income Tax Assessment Act 1997 (ITAA 1997)? | No, see our 'Reasons for decision' | The arrangement commences on: The arrangement has commenced. | Do these interests satisfy requirements of the transitional rules for notional taxed contributions under section 291-170 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997)?