New ATO ID issued on allocation from reserves
· Last update on 9, August, 2015
· under ATO
The ATO has published ATO ID 2015/22, entitled 'ECT: concessional contributions - allocation from 'pension reserve account' supporting 'complying lifetime pension' (CLP). This ID is an update of ATO ID 2012/84 to reflect that the excess concessional contributions tax provisions were moved from Division 292 of the ITAA 1997 to Division 291.
Therefore, the ID only applies for the 2014 and later income years, with ATO ID 2012/84 applying before this time.
In ATO ID 2015/22, the ATO concluded that a member who commuted a complying lifetime pension has concessional contributions equal to the amount allocated from the reserve account to commence an account-based pension.
The facts of the ID were quite detailed, and were as follows:
· An SMSF has two members.
· On 1 July 2008, one of those members commenced an indexed pension with $1.3 of capital that was payable for their life, and their death, their spouse's life. The pension satisfied Reg 1.06(2) (i.e., the pension was a lifetime complying pension).
· An amount of $200,000 was retained in accumulation phase for the member.
· At all times, the CLP satisfied the requirements of Reg 1.06(2).
Rules of the fund
The rules of the fund were as follows:
· the trustee is required to maintain member accounts:
o the trustee must, for each member, keep accounts which record contributions received, income earned, amounts allocated to or from reserves, benefits paid and all other amounts added to or deducted from the member's account;
o the balance of a member's account must be positive;
o more than one account can be kept for a member; and
o an account for a member can be an 'accumulation account' or a 'pension account'.
· the trustee is authorised to maintain reserves:
o the trustee may establish such reserves and add and allocate amounts to, and deduct amounts from, those reserves as considered appropriate (provided it does not result in the fund becoming non-complying); and
o the trustee is required to formulate a separate investment strategy for the prudential management of any reserve such that the trustee is able to discharge its liabilities as and when they fall due.
· the trustee is authorised to provide a pension that satisfies the requirements of the SIS Regulations, including subregulation 1.06(2):
o the trustee must consult with an actuary before commencing to pay a complying lifetime pension to determine the amount to be set aside by the trustees to fund the pension, any reserves required and the relevant terms and conditions of the pension; and
o the trustee, in its sole discretion, is authorised to apply any amount standing in a member's accumulation account, pension account or a reserve for the benefit of the provision of a pension to a member.
Trustees resolutions
In accepting the relevant member's application to commence the complying lifetime pension, the trustees resolved to establish:
· a pension account from which the pension was to be paid, with an amount or assets transferred from the relevant member's account balance in the fund, and
· reserve accounts as required by the fund's actuary.
The member was informed of those decisions on 1 July 2008. On the same day, a father resolution was made to establish a pension reserve account in accordance with the fund rules to guarantee the payment of amounts required by the term of the CLP. The pension reserve is to be used to provide the trustees with reserve assets if the investments perform poorly and an actuary's opinion is to credit the reserves to the CLP.
Accounting for the complying lifetime pension
The following points were noted with regards to the accounting side:
· The fund's actuary advised that the sum of $1.3 million could be used to provide an indexed pension equal to $59,500 in the first year, with indexation of 3% per annum for the lives of the relevant member and their spouse.
· At the commencement of the complying lifetime pension, the actuary's best estimate of the value of the complying lifetime pension was $920,000.
· The balance of the $1.3 million with which the pension was commenced was recorded in an account designated the 'pension reserve account'.
· However, the actuary indicated to the trustees that the balance of that account, being $380,000 (i.e., $1.3m less $920,000), comprised an investment adequacy amount of $210,000, a mortality amount of $60,000 and a surplus amount of $110,000.
· At the end of each year, the member's accumulation account balance, and/or account-based pension account is subtracted from the member's total account balance, with the remainder relating to the CLP. The actuary's best estimate of the value of the CLP is recorded, with the remaining value recorded as the pension reserve account (split between an investment adequacy amount, a mortality amount and a surplus amount (if any)).
Commutation of the complying lifetime pension
On 30 June 2014, the member applied to commute the CLP by having the balance of the:
· CLP' transferred for the member to commence a market linked pension that meets the requirements of 1.06(8) of the SIS Regs 1994, and
· 'pension reserve account' allocated to the relevant member for the member to commence a pension an account-based pension that meets Reg 1.06(9A)(a) of the SIS Regs 1994.
At 30 June 2014, on the advice of an actuary, the trustees of the fund had recorded the balance of the relevant member's complying lifetime pension account as $1.2 million and the pension reserve account as $450,000 (comprising an investment adequacy amount of $170,000, a mortality amount of $90,000 and a surplus amount of $190,000). The balance of the two accounts totalled $1.65 million.
On 1 July 2014, the trustees commuted the CLP as requested by the relevant member. The trustees treated the balance of theCLP ($1.2 million) as the amount of the superannuation lump sum resulting from the commutation, which was transferred for the member to commence the market linked pension. The balance of the pension reserve account ($450,000) was allocated to the member and used by them to commence an account-based pension.
The ATO concluded that the amount allocated from the reserve to commence an account-based pension counted towards the member's concessional contributions cap, for the reasons outlined below.
Outline of relevant excess contributions tax (ECT) provisions
An allocation from a reserve counts towards the member's concessional contributions cap as per Regulation 292-25.01 unless an exclusion applies. Refer to S.291-25(1) and (3).
The relevant exclusion in Reg 292-25.01(4)(b) excepts the following amount from counting as a concessional contribution:
(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;
(C) ......
As outlined in ATO ID 2015/21, the Commissioner considers that reserve as used in Reg 292-25.01 has a broad meaning and includes an amount set aside from amounts allocated to particular member to be used for a certain purpose. In this case, the Commissioner considers that the CLP and the reservetogether represent a reserve for the purposes of Reg 292-25.01 to guarantee the payments for the CLP.
Commutation of the income stream
Reg 1.06(2)(e)(iii) of the SIS Regs allows a CLP to be commuted if the superannuation lump sum resulting from the commutation is transferred directly for the purpose of purchasing a specified income stream, which includes a market linked pension, but not an account-based pension. Refer also to Reg 6.17C, which states that a CLP can only commuted to commence another CLP or another type of 'complying' pension (being a pension covered under Reg 1.06(2), 1.06(7) or 1.06(8).
Note, Reg 1.06(1B) of the SIS Regs 1994 allows the trustees to commence a new market linked pension after 20 September 2007 only if certain conditions are met - one of those conditions being that the new market linked pension meets the requirements of Reg 1.06(8) and 1.06(9A). The SIS Regs do not allow a trustee to commute a CLP solely to commence an account-based pension - refer to Reg 1.06(1B) or (2).
Applying the exception in Reg 292-25.01(4)(b)
As noted above, the Commissioner's view is that the CLP account and pension reserve jointly represent a reserve for the purposes of Reg 292.25.01. Therefore, if both amounts were used to commence a market linked pension, the exception in Reg 292-25.01(4)(b)(ii)(B) would be met. However, where an amount from the reserve is allocated to an account-based pension, that allocation is contrary to Regs 1.06(1B), 1.06(2)(e)(iii) and would not satisfy the exception in Reg 292-25.01(4)(b)(ii)(B).