Latest developments from NTLG Superannuation Technical Sub-group and consultation with the ATO with comment on superannuation cases and issues of the last 12 months Rob Jeremiah

16 August 2013

Topics

Topics 1. New framework for consultation with the ATO on superannuation

2. NTLG Superannuation Technical Sub-group (NTLG STSG) up-date

3. Some recent superannuation cases

Sladen Legal presentation title | 16 August 2013

New Consultation and Engagement Framework

New Consultation and Engagement Framework

1. On 18 July 2013 the ATO notified NTLG STSG members from 1 July 2013 a “renewed consultation and engagement framework” had commenced

2. ATO Advised: • No limitation on opportunity to consult and engage with the ATO on tax

and superannuation • New dynamic and flexible approach designed to refresh and invigorate

the consultative process by promoting targeted and purposeful engagement

New Consultation and Engagement Framework (cont’d)

New Consultation and Engagement Framework (cont’d) • Superannuation issues of national interest to be conducted under

the new “Superannuation Advisory Group” (SAG) which to be established

• Discussion about new arrangements to be held at next and last NTLG STSG meeting on 3 September 2013

• At the final NTLG STSG meeting information will be provided on the implementation of the new framework including the new stakeholder registration process for the SAG

New Consultation and Engagement Framework (cont’d)

Previous consultative forums

In a letter to members of all consultative forums the Commissioner advised: • 68 forums • approximately 1500 participants • 230 meetings a year

New Consultation and Engagement Framework (cont’d)

Framework for consultation

1. Eight stewardship committees with strategic relationship and advisory roles one of which will be the SAG

2. Project like consultation where engage with: • right people • at right time; and • in right manner

3. Consultation hub that is a co-ordination unit and intelligence centre

NTLG STSG update – Top 3 issues

NTLG STSG update – Top 3 issues Top 3 issues of significance as at March 2013: 1. tax and regulatory consequences of TR 2011/D3 including ECPI 2. successor fund transfers 3. in-house asset rules under s.71(8) SISA where asset still held by

holding trust after borrowing repaid

NTLG STSG up-date – Top Issue 1

NTLG STSG up-date – Top Issue 1 – TR 2011/D3 – Life of a pension

1. ATO advised finalisation of TR 2011/D3 dependent upon progress of legislation for the announced MYEFO 2012/13 amendments

2. Legislative amendments to allow income tax exemption for assets supporting superannuation pensions to continue following the death of the pension member until the deceased member’s benefits are paid out

NTLG STSG up-date – Top Issue 1 (cont’d)

NTLG STSG up-date – Top Issue 1 – TR 2011/D3 – Life of a pension (cont’d) 3. Even though proposed amendments to only apply from the 2012/13 year

in the NTLG STSG meeting of March 2013, the ATO indicated the then thinking of the Commissioner was:

“It is not appropriate for the ATO to take compliance action in respect of income years before the 2012-13 income year to apply the views expressed in the ruling with regard to when an income stream ceases on the death of the member in respect of the income stream”

4. If asked for a formal view (for example for a private ruling) as to when a superannuation income stream (SIS) ceases, the Commissioner’s view will be consistent with the final ruling (now released as TR 2013/5)

Beware!

When a SIS commences

When a SIS commences – TR 2013/5 (in draft form TR 2011/D3)

From TR 2013/5 released on 1 August 2013: 1. the commencement day for a SIS is the first day of the period to which the

payment of the SIS relates 2. when the commencement day occurs is determined by reference to the

terms and conditions of the SIS agreed by the trustee and the member, the rules of the SIS as set out in the governing rules of the superannuation fund and the relevant regulations of the SISR; and

3. a SIS ceases when there is no longer a member who is entitled or a dependant beneficiary who is automatically entitled to be paid a SIS benefit from a superannuation interest that supports a SIS

NTLG STSG up-date – Top Issue 1 (cont’d)

NTLG STSG up-date – Top Issue 1 – 2012-13 MYEFO amendments

Extension to tax exemption on earnings of a complying superannuation fund (CSF) after death of superannuation pensioner: 1. By Income Tax Assessment Amendment (Superannuation Measures No.1)

Regulation 2013 the meaning of superannuation income stream benefit has been expanded

2. The expanded meaning applies from the 2012/13 income year and its effect is: • where a CSF member was receiving a SIS immediately before their

death; and

NTLG STSG up-date – Top Issue 1 (cont’d)

NTLG STSG up-date – Top Issue 1 – 2012-13 MYEFO amendments (cont’d) • the SIS did not automatically revert to another person on the member’s

death an amount that is paid from the superannuation interest supporting the deceased’s income stream as a death benefit lump sum or is applied to commence a new SIS is taken to be a SIS benefit payable by the CSF for a specified period From the explanatory memorandum – “This means that the superannuation fund will continue to be entitled to the earnings tax exemption in relation to such an amount during” the specified period

NTLG STSG up-date – Top Issue 1 (cont’d)

NTLG STSG up-date – Top Issue 1 – 2012-13 MYEFO amendments (cont’d) Period of extension of tax exemption 3. The “specified period” is in the case of a:

• death benefit lump sum from the death of the member “until as soon as it was practicable to pay the superannuation lump sum”

• new SIS being commenced using an amount applied from a superannuation interest which was supporting a SIS payable to a deceased member “until as soon as it was practicable to commence the new SIS”. Refer Income Tax Assessment Amendment (Superannuation Measures No.1) Regulation 2013

NTLG STSG – Top Issue 1 (cont’d)

NTLG STSG – Top Issue 1 - 2012-13 MYEFO amendments (cont’d)

4. The amount taken to be a SIS benefit payable is reduced to the extent to which it is attributable to amounts, other than “investment earnings”, added to the superannuation interest on or after the deceased’s death

5. “Investment earnings” does not include an amount paid under a policy of insurance on the life of the deceased or an amount arising from self-insurance

NTLG STSG – Top Issue 1 (cont’d)

NTLG STSG – Top Issue 1 - 2012-13 MYEFO amendments (cont’d)

The proportioning rule and the taxable components of superannuation benefits after the death of a superannuation pensioner 1. Where a superannuation death benefit lump sum or a superannuation benefit

paid from a new SIS after the death of a deceased member is not attributable to an anti-detriment increase or an insurance-related amount paid or arising on or after the deceased’s death the tax free and taxable components of the benefit will be the same as when the original superannuation income stream benefit commenced

NTLG STSG – Top Issue 1 (cont’d)

NTLG STSG – Top Issue 1 - 2012-13 MYEFO amendments (cont’d) 2. Where the death benefit or new SIS benefit is to any extent attributable to

an anti-detriment increase or an insurance-related amount paid or arising on the deceased’s death, the proportioning approach above applies to the amount of the benefit as reduced by the extent to which it is so attributable. The anti-detriment increase and the insurance-related amount are effectively included in the taxable component of the benefit

NTLG STSG – Top Issue 2

NTLG STSG – Top Issue 2 – Successor Fund Transfers 1. ATO has settled view in relation to the application of ITAA 1977 to

successor fund transfers between CSFs 2. ATO view:

• where assets are transferred from one CSF (original fund) to another CSF (successor fund) pursuant to a merger where some or all of the members of the original fund become members of the successor fund, the original fund makes a payment to the successor fund that is a superannuation benefit; and

• the payment of each member’s benefit is a roll-over superannuation benefit

NTLG STSG Minutes December 2012

and March 2013 (confirming position stated in December 2012 Minutes)

NTLG STSG – Top Issue 2 (cont’d)

NTLG STSG – Top Issue 2 – Successor Fund Transfers (cont’d)

1. For members with accumulation interests: • the tax free and taxable components of the member’s benefits before

the transfer must be calculated by the trustee of the original fund; and • the tax free component of the roll-over superannuation benefit will form

the contributions segment of the member’s interest in the successor fund

2. However, the Government has announced it will ensure that superannuation fund members are not disadvantaged where their benefits are rolled over within a fund or between funds in response to the stronger super reforms. New legislation is to apply from 1 July 2013

NTLG STSG – Top Issue 3

NTLG STSG –Top Issue 3 – In-house asset exemption under s.71(8) SISA No further developments on clarification of whether the in-house asset exemption under s.71(8) SISA which relates to the interest held under a holding trust established for the purposes of a LRBA will continue to apply where the acquirable asset is still held by the trust after the relevant borrowing has been repaid

NTLG STSG – Some technical questions and ATO answers

NTLG STSG – Some technical questions and ATO answers

From the March 2013 minutes: 1. Can an account-based pension established as ‘non-reversionary’ be made

‘reversionary’ by executing appropriate documentation and not necessarily by having to commute the pension and commence a new pension? ATO response: ATO cannot provide a response. It will depend on the terms on which the account-based pension is payable, the fund’s deed or governing rules and any other restrictions imposed by law. Further: the ATO does not accept that a non-reversionary pension can be made reversionary after the death of the pensioner member

NTLG STSG – Some technical questions and ATO answers (cont’d)

NTLG STSG – Some technical questions and ATO answers (cont’d) 2. Investment by superannuation funds in limited liability partnerships:

ATO response: Whether an investment by a superannuation fund as a limited partner in a limited liability partnership contravenes SISA will depend upon the specific facts. However, the ATO noted four possible contraventions and stated that “a more appropriate avenue to address any specific scenario relating to this topic is in a request for specific advice

NTLG STSG – Some technical questions and ATO answers (cont’d)

NTLG STSG – Some technical questions and ATO answers (cont’d) 3. Lifetime pensions, reserve allocations and ATO ID 2012/84

The ATO confirmed its view expressed in ATO ID 2012/84 concerning the commutation of a lifetime pension and establishment of a new pension.

4. LRBA’s and a ‘two step’ transfer process, payment of deposits and timing of establishment of holding trust:

NTLG STSG – Some technical questions and ATO answers (cont’d)

NTLG STSG – Some technical questions and ATO answers (cont’d) ATO response:

• A superannuation fund trustee must not at any stage hold the single acquirable asset prior to it being acquired by the trustee of the holding trust under a LRBA. The ATO view is that an SMSF trustee obtaining legal title to the asset, even for a short period of time, prior to it being acquired by the holding trust will breach s.67A SISA

• A deposit and further instalments can be paid under a LRBA from borrowed money or from superannuation fund assets for the acquisition of a single acquirable asset. Further, until there is a borrowing of money there is nothing to which s.67A can or needs to provide an exception to the prohibition in s.67

NTLG STSG – Some technical questions and ATO answers (cont’d)

NTLG STSG – Some technical questions and ATO answers (cont’d)

• It is not necessary for the holding trust under a LRBA to exist when the contract to purchase is entered into. However it is essential that the acquirable asset is transferred directly to the trustee of the holding trust and not via the superannuation fund

NTLG STSG – Some technical questions and ATO answers (cont’d)

NTLG STSG – Some technical questions and ATO answers (cont’d) 5. Control of a unit trust

• Is a person with a 50% interest in a unit trust taken to control the trust under s.70E(2)(b) of SISA?

ATO response: An entity does not control a trust by reason of paragraphs 70E(2)(a), (b) or (c) SISA where the entity and or it or their associates (group) have a 50% or less interest in the capital or income of the trust unless because of some other factor the group have actual control of the trust. For example, through having the power to remove the trustee or a majority of the trustees or on an equality of votes a casting vote, or the trustee or trustees is accustomed or under an obligation to act in accordance with the directions, instructions or wishes of the group

Some recent superannuation cases

SCCASP Holdings Pty Ltd v FC of T [2013] FCAFC 45

1. In this case: • taxpayer argued that despite the fact that net capital gain was

assessable income it was not income that the fund derived in its capacity as a beneficiary of a trust estate because it had not actually been received and therefore had not been derived

• the court rejected the argument and found the purpose of the word derived in s.273(6) ITAA 36 was to identify the source, not the receipt, of the income in order to prevent some income from being classified as ordinary income and being assessed at the concessional rate

• the court also expressed the view that Allen’s case was not wrongly decided

Some recent superannuation cases (cont’d)

Verschuer v FC of T [2013] AATA 12

1. No special circumstances to warrant the re-allocation of contributions 2. AAT found that clearly a contribution was made in the relevant period, but it

was not clear that the contribution could be said to have been “made” to a CSF in the relevant period

3. The AAT found that the payment of an amount into a “clearing account” of a superannuation provider is not a payment to a superannuation fund. The account is not an account held by or in the name of the trustee of a superannuation fund

Some recent superannuation cases (cont’d)

Ghali Superannuation Fund v FC of T 2012 ATC 527

1. The AAT held that the income of a fund from a related unit trust was special income under s.273 ITAA 36 (now replaced by s.295-550 ITAA 97)

2. The AAT considered that “fixed entitlement” in s.273 takes the meaning provided in s.272-5 in Schedule 2F to ITAA 36 (Trust loss provisions)

3. The Commissioner of Taxation states in his Decision Impact Statement he maintains the view that the definition in Schedule 2F does not apply as:

• s.272-140 of Schedule 2F provides “in this Schedule [2F] fixed entitlement has the meaning given by Subdivision 272-A”

Some recent superannuation cases (cont’d)

Ghali Superannuation Fund v FC of T 2012 ATC 527 (cont’d)

• fixed entitlement is not defined in s.6 ITAA 36; and • There is nothing in s.273 that suggests that the Schedule 2F definition

applies 4. The Commissioner considers that this is a more favourable approach for

superannuation funds and proposes to adhere to his existing view that the Schedule 2F definition is inapplicable for the purposes of s.273 ITAA 36 and its successor s.295-550 ITAA 97

Some recent superannuation cases (cont’d)

Hamad v FC of T [2012] AATA 530 1. Special circumstances existed that warranted the re-allocation of

contributions made in July 2009 to the year ended 30 June 2009 2. The taxpayer had checked his pay advices each month and was misled by

his employer into believing contributions had been made during the year ended 30 June 2009. The employer had retained the contributions and made late payments

3. The AAT held that even though the statements for the periods ending 30 June and 31 December 2009 gave the taxpayer notice of the overpayments, it was reasonable for the taxpayer to expect that his employer would make payments when they were shown in the pay advices given to him

Some recent superannuation cases (cont’d)

The Applicant v FC of T [2012] AATA 754

1. A taxpayer who mistakenly believed that contributions received by a fund just after the end of June were allocated to June was unsuccessful in her claim that special circumstances existed

2. The AAT accepted that the taxpayer acted responsibly and in accordance with the objective of DIV.292. However, a mistaken belief or ignorance as to the consequences of making a superannuation contribution in July was not enough to establish “special circumstances” for the exercise of discretion under s.292-465

Thank you for your attention