Issue
Can surchargeable contributions arise when a member of a superannuation scheme is granted accumulation benefits instead of defined benefits?
Decision
Yes. The amount of surchargeable contributions reported as a result of any increase in the actuarial value of the member's benefit is determined by an eligible actuary and reported by the superannuation scheme, as well as the amount that is normally reported for the member. The total is taken into account in determining the member's surcharge assessment.
Facts
The scheme is a defined benefits superannuation scheme.
A member with defined benefits is granted an accumulation benefit in exchange for their defined benefit entitlement.
The surchargeable contributions notified to the Australian Taxation Office (ATO) by the superannuation scheme were based on the actuarial value of the benefits that accrued to, and the value of the administration expenses and risk benefits provided in respect of, each member of the defined benefits superannuation scheme.
All of the surchargeable contributions reported for the member were included in the member's surcharge assessment for the year.
Reasons for Decision:
A defined benefits superannuation scheme is defined in section 43 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 ( SCTA ) as a public sector scheme or a regulated superannuation fund 'that has at least 1 defined benefit member'.
Subsection 13(2) of the SCTA provides that every superannuation provider must give the Commissioner a member contributions statement (MCS) which includes details of the contributed amounts reported by the superannuation scheme for each member.
The definition of contributed amounts for a defined benefits superannuation scheme is provided in section 43 of the SCTA as: 'contributed amounts (b) in relation to a member of a defined benefits superannuation scheme for a financial year: (i) means the surchargeable contributions of the member for the financial year; and (ii) includes any other amount that may be reasonably regarded as attributable to the member under the scheme for the financial year.'
Subsection 8(3) of the SCTA provides that: 'the surchargeable contributions for a financial year of a member of a defined benefits superannuation scheme are the amounts that constitute the actuarial value of the benefits that accrued to, and the value of the administration and risk benefits provided in respect of, the member for the financial year.'
Subsection 8(5) of the SCTA provides the method to be used when calculating the actuarial value that accrued to, and the value of the administration expenses and risk benefits provided in respect of a member of a defined benefit superannuation fund for the 1999 - 2000 financial year or a later financial year as: '(a) the method set out in the regulations, being a method that excludes contributions made by the member for which the member is not entitled to an income tax deduction under the Income Tax Assessment Act or under the Income Tax Assessment Act 1997 ;' unless another method has been approved by the Commissioner.
Regulation 2L of the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997 (SCTR) provides for the method used by an eligible actuary for the 1999 - 2000 financial year to be as set out in Superannuation Contributions Ruling SCR 97/1, unless another method has been approved by the Commissioner.
Regulation 2M of the SCTR provides for the method used for the 2000 - 2001 or later financial years to be as set out in Schedule 2 to the SCTR. Schedule 2 to the SCTR describes the method to be used by an eligible actuary for each component of surchargeable contributions.
Section 24 of the SCTA provides that when making a decision on an objection from a member of a superannuation scheme or a superannuation provider the Commissioner is entitled to rely on the latest assessment of the member's taxable income and the latest statement of the member's surchargeable contributions reported in the MCS by the superannuation provider.
The reasons why conversion of a defined benefit to an accumulation benefit can give rise to surchargeable contributions include the following:
The actuarial valuation basis used for surcharge purposes was determined after consultation with the actuarial profession, as representing a reasonably realistic basis on which to base surcharge liabilities, to ensure that the surchargeable contributions reported from year to year were not overstated. The actuarial valuation bases typically used for other purposes such as to establish contribution rates or alternative benefits are often more conservative than the surcharge valuation basis. This means that when the actuarial value of the change from a defined benefit to an accumulation benefit is calculated, use of the surcharge valuation basis can give rise to an increase in the value of the benefit which is then reported as surchargeable contributions by the superannuation scheme.
The increased benefits granted represent contributions in the year that they are received.
The reporting that applies to defined benefits superannuation schemes allows the actuarial calculations to make some allowance for vesting with unvested benefits progressively being reported for surcharge as they vest. The reporting that applies to accumulation benefits is far simpler and does not require an actuary. However, this means that the full contributions credited to the member's account are reported for surcharge as they are credited, including any unvested contributions. Any unvested portion of the new benefit granted to the member is thus reported as a once off surchargeable contribution at the time the benefit is converted from defined benefits to accumulation.
Subsection 13(5A) of the SCTA requires a superannuation provider who has reported surchargeable contributions to the ATO for the 1998 - 1999 or later financial years, to give the particulars included in the MCS to a member who has requested this information from the superannuation provider, within 30 days of receiving the request.