Issue
Will the Commissioner approve another method for the calculation of surchargeable contributions where an increase in benefits, paid for out of surplus, is granted to a member of a defined benefits superannuation scheme who: (1) Is in receipt of a pension that commenced to be paid on or before 20 August 1996 (or the pension commenced as a contingent benefit on the death of another pensioner whose pension commenced on or before 20 August 1996); (2) Is in receipt of a pension that commenced to be paid after 20 August 1996 (or the pension commenced as a contingent benefit on the death of another pensioner whose pension commenced after 20 August 1996); or (3) Has not yet received a benefit.
Decision
Yes. The amount of surchargeable contributions arising from any increase in the actuarial value of the member's pension can be calculated as nil, if the pension commenced on or before 20 August 1996 (or the pension commenced as a contingent benefit on the death of another pensioner whose pension commenced on or before 20 August 1996).
No. The Commissioner does not approve another method for the calculation of surchargeable contributions: (1) where an increase in benefits is granted to a member of a defined benefits superannuation scheme receiving a pension, and the pension commenced after 20 August 1996 (or the pension commenced as a contingent benefit on the death of another pensioner whose pension commenced after 20 August 1996); or (2) where an increase in benefits is granted to a member of a defined benefits superannuation scheme who has not yet received a benefit.
Facts
The scheme is a defined benefits superannuation scheme that has been closed to new members since prior to 20 August 1996.
The scheme contains 2 sections.
One section is in the nature of an accumulation fund and the members have the right from age 55 to forgo the accumulation benefit in favour of benefits from the other section.
The retirement benefit in the other section is a pension to the member (with a reversionary benefit to the widow/widower who was a spouse at the time of the member's retirement and a child pension); the retirement and spouse pensions are indexed annually in line with CPI at 1 July, but the deed also empowers the trustee to scale up the pension in line with normal actuarial advice.
The initial pension is determined depending on age at retirement and earnings immediately prior to retirement; there is a deed requirement for the pension to be increased by a fixed percentage, but the trustee has absolute discretion to further increase the pension.
An increase in pension benefits was previously granted prior to 1 July 2000 and notional surchargeable contributions factors have been calculated on the basis of a pension a fixed percentage higher than the base pension.
At 1 July 2000, the trustee increased the scaling up factor for the pension; there is an expectation that the increase will be maintained, there is no guarantee of this.
Reasons for Decision
Section 5 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (SCTA) provides that the object of the Act is to assess and collect surcharge on the surchargeable contributions of high income earners.
A high income earner is a person whose adjusted taxable income (defined in section 43 of the SCTA) exceeds the threshold set out in section 9 of the SCTA.
Subsection 8(3) of the SCTA provides that the surchargeable contributions for a financial year for 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 expenses and risk benefits provided in respect of, the member for the financial year.
Subsection 8(4) of the SCTA provides that surchargeable contributions for the years ended 30 June 1997, 1998 and 1999 are to be calculated using the formula Annual salary * notional surchargeable contributions factors
where notional surchargeable contributions factors are worked out in accordance with the method set out in Superannuation Contributions Rulings SCR 97/1.
Subsection 8(5) of the SCTA, in conjunction with regulation 2L, subregulation 2M(3) and Schedule 2 to the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997, sets out the method for calculating surchargeable contributions for the year ended 30 June 2000 and later financial years - either by using: (i) the formula - annual salary x notional surchargeable contributions factor - where the notional surchargeable contributions factors are calculated in line with the standard set out in SCR 97/1; or (ii) the standard method set out in the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997.
The attachment to the Treasurer's August 1996 Budget press release, introducing the superannuation contributions tax (surcharge), indicated the measure would not affect people already in retirement.
It is clear from the Treasurer's 1996 Budget press release that the Government did not intend the surcharge measure apply to people who had retired on or before 20 August 1996.
The Government intended that surcharge apply to the surchargeable contributions of high income individuals from 20 August 1996.
The fact the employer has no intention of varying the contribution rate does not take away from the fact that there has been a benefit improvement granted after 20 August 1996. For those people who retired after 20 August 1996 and for those who have not as yet retired but who will elect to take a pension on retirement, that benefit improvement is surchargeable.
In an accumulation arrangement, the members bear the risk of investment decisions and either profit from good investment decisions or suffer any losses as a result of poor investment decisions. In a defined benefit arrangement, the members receive their defined benefit notwithstanding the outcome of investment decisions - a defined benefit member may only profit from good investment decisions if the scheme rules are changed or the trustees exercise a discretion to improve the defined benefit by way of a distribution of the investment returns.
It is not the role of the Commissioner to put in place special arrangements to cater for the risk that the increased pension will not be paid in future. This is a matter for the trustees to consider (with the benefit of any appropriate actuarial advice) before granting the increased benefits. Any increase granted after 20 August 1996 is surchargeable.
The standard actuarial valuation basis for calculating surchargeable contributions set out in the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997 represents a reasonable and realistic actuarial method for determining surchargeable contributions in most cases, including where increases to benefits are granted, irrespective of whether or not they are paid for from surplus.
The fact that granting an increase to benefits results in surchargeable contributions does not justify changing from the standard actuarial basis for determining those contributions.