Issue
Does the Commissioner approve another method for the calculation of surchargeable contributions, where a member of a defined benefits superannuation scheme is granted an accumulation benefit instead of the member's pre-existing benefit.
Decision
No. The Commissioner does not approve another method for the calculation of surchargeable contributions, where a member of a defined benefits superannuation scheme is granted an accumulation benefit instead of the member's pre-existing benefit.
Facts
The superannuation scheme is a defined benefits superannuation scheme.
Section 5 of the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (SCT) provides that the object of the SCT is to assess and collect surcharge on the surchargeable contributions of high income individuals.
A high income individual is a person whose adjusted taxable income (defined in section 43 of the SCT) exceeds the threshold set out in section 9 of the SCT.
Subsection 8(3) of the SCT provides that the surchargeable contributions for a member of a defined benefits superannuation scheme for a financial year 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 SCT, in conjunction with regulations 2L and 2M of 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 Superannuation Contributions Ruling SCR 97/1; or (ii) the standard method set out in the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997 - see subregulation 2M(3) and Schedule 2.
Members have been offered an accumulation benefit in exchange for their pre-existing benefit. If the members accept this offer they receive an increase, which constitutes a discretionary employer provided benefit as defined in Part 5 of Schedule 2 of the Superannuation Contributions Tax (Assessment and Collection) Regulations 1997.
The value of the accumulation benefits offered reflects the whole of the member's membership in the scheme prior to resignation. However, there is no entitlement to an increase in the value of benefits until such time as the member accepts the offer to convert to accumulation benefits and that acceptance occurs after 20 August 1996.
The trustee of the superannuation scheme has submitted a request for the Commissioner to approve another method under subsection 8 (5) (b) of the SCT.
Reasons for Decision
The Government intended that surcharge apply to the surchargeable contributions of high income individuals from 20 August 1996.
There is no previous entitlement to the increased benefit granted as a result of the decision to convert to accumulation benefits until the decision is made to convert and as such, the increase in value is brought to account in the financial year in which the conversion occurs (the fact the value of the increase may be measured from an earlier date does not create an earlier entitlement).
The fact that the additional benefits granted to members who accept the offer after 20 August 1996 can be met in full from the reserves already held for the relevant members does not take away from the fact that there has been a benefit improvement granted after 20 August 1996. That benefit improvement is surchargeable.
The standard actuarial valuation basis for calculating surchargeable contributions set out in Superannuation Contributions Ruling SCR 97/1 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 reserves.
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.