Excess contributions tax: notional taxed contributions - superannuation salary increases

Should the trustee of a superannuation fund determine the increase in the rate of the member's superannuation salary for the purposes of subregulation 292-170.05(5) of the Income Tax Assessment Regulations 1997 (ITAR 1997) each time the rate of the member's superannuation salary is increased?

Yes. The trustee of a superannuation fund should determine the increase in the rate of the member's superannuation salary on the date that the member's superannuation salary increases.

A person is a member of the ABC superannuation fund. The member has a defined benefit interest in the ABC fund. ABC fund has more than five defined benefit members. The member held the defined benefit interest in the ABC fund on 5 September 2006.

The member's defined benefit is calculated with reference to their superannuation salary. The member's superannuation salary is determined every 6 months - at the same time the employer reviews their actual salary.

The member gained a promotion and their salary, along with their superannuation salary, increased to $80,000 commencing 1 January 2008. On 1 January 2007, the member's superannuation salary was $50,000 and on 1 January 2005 their superannuation salary was $46,000.

The member's employer-sponsor advised the trustee of the ABC fund that the increase in the member's salary was on an arm's length basis.

Subsection 291-170(2) of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) sets out the conditions that are to be satisfied in relation to establishing whether notional taxed contributions for a financial year in respect of a defined benefit interest (in a fund with five or more defined benefit members) are equal to the concessional contributions cap for the financial year. Paragraph 291-170(2)(d) of the ITTPA 1997 requires certain conditions set out in regulation 292-170.05 of the ITAR 1997 to be satisfied.

One condition as prescribed in subregulation 292-170.05(5) of the ITAR 1997 reads: If the rate of superannuation salary has increased, since 5 September 2006, by: (a) more than 50% in 1 year; or (b) more than 75% over 3 years; a condition is that the employer-sponsor advises the trustee that the increase in the rate is on an arm's length basis.

Both tests under subregulation 292-170.05(5) of the ITAR 1997 must be completed each time a member's rate of superannuation salary increases. The initial test under this subregulation should be completed by the trustee the first time the rate of superannuation salary increases after 5 September 2006. The tests are only required to be completed when there is an increase in the rate of salary for superannuation purposes, even though there may be changes in the member's salary at any time.

The test under paragraph 292-170.05(5)(b) of the ITAR 1997 - for determining whether the rate of superannuation salary has increased more than 75% over 3 years - should be applied on the same day as the test in paragraph 292-170.05(5)(a) of the ITAR 1997. The superannuation salary on that day should be compared to the superannuation salary on the same day three years earlier.

If either, or both, rates specified in subregulation 292-170.05(5) of the ITAR 1997 are exceeded the trustee is required by subregulation 292-170.05(7) of the ITAR 1997 to notify the Commissioner as soon as practicable after the increase occurs that either, or both, rates have been exceeded.

In the case at hand, the member's superannuation salary increased on 1 January 2008 to $80,000. The test in paragraph 292-170.05(5)(a) of the ITAR 1997 requires the trustee to compare that salary with the member's superannuation salary on 1 January 2007 of $50,000. This represents an increase of more than 50% in the rate of superannuation salary in one year. As soon as practicable after 1 January 2008 the trustee is required to notify the Commissioner in writing that the rate in paragraph 292-170.05(5)(a) has been exceeded.

As the trustee has received advice from the member's employer-sponsor that the increase in salary was on an arm's length basis the condition in subregulation 292-170.05(5) of the ITAR 1997 is satisfied.

The member's superannuation salary on 1 January 2008 is also compared by the trustee to the member's superannuation salary on 1 January 2005 of $46,000 to determine the increase in the rate of the member's superannuation salary for the test in paragraph 292-170.05(5)(b) of the ITAR 1997. As the increase is less than 75% over the three years the test is passed.

Note: From 1 July 2013, the rules for determining concessional contributions for defined benefit interests in section 292-170 of the ITAA 1997 have been repealed as part of the repeal of the excess contributions tax. These rules are now contained in section 291-170 of the ITAA 1997. However, the regulations made for the purposes of former section 292-170 of the ITAA 1997 continue to apply to determine notional taxed contributions for the purposes of section 291-70 of the ITAA 1997. Saving provisions in Subdivision 291-C of the ITAA 1997 ensure the continuing application of the excess concessional contributions tax system for the 2012-13 and prior financial years, despite the repeal of former section 292-170 of the ITAA 1997.

Date of amendment Part Comment 11 September 2015 Reasons for decision Minor change in the Note section where the legislative reference should read section 291-170 of the ITAA 1997. Legislative references Updated. 14 February 2014 Reasons for Decision Section 292-170 of the ITAA 1997 has been repealed with effect from 1 July 2013 as part of the repeal of the excess contributions tax. Saving provisions contained in Subdivision 291-C of the ITAA 1997 ensure the continuing application of the excess concessional contributions tax system for the 2012-13 and prior financial years, despite the repeal of former section 292-170 of the ITAA 1997. Legislative references Updated Siebel reference number Updated

Date of amendment | Part | Comment

11 September 2015 | Reasons for decision | Minor change in the Note section where the legislative reference should read section 291-170 of the ITAA 1997.

Legislative references | Updated.

14 February 2014 | Reasons for Decision | Section 292-170 of the ITAA 1997 has been repealed with effect from 1 July 2013 as part of the repeal of the excess contributions tax. Saving provisions contained in Subdivision 291-C of the ITAA 1997 ensure the continuing application of the excess concessional contributions tax system for the 2012-13 and prior financial years, despite the repeal of former section 292-170 of the ITAA 1997.

Legislative references | Updated

Siebel reference number | Updated