Superannuation benefits: CSS indexed pension partially funded by a roll-over

Will the taxable component of a standard indexed pension to be paid to a member of the Commonwealth Superannuation Scheme (CSS) include an element taxed in the fund when the employer component of a transfer value originating in a taxed fund is paid to the Commonwealth?

Yes, the taxable component of a standard indexed pension to be paid to a member of the CSS will include an element taxed in the fund when the employer component of a transfer value originating in a taxed fund is paid to the Commonwealth.

A taxpayer rolled over a total of $100,000 during the 2004-05 and 2005-06 income years to the CSS, which is administered by ComSuper. The roll-overs were from complying superannuation funds (which were not constitutionally protected funds (CPFs)). The roll-overs included employer components of $87,000.

The standard indexed pension of the taxpayer on retirement paid from CSS is based on a formula which depends on the total length of contributory service.

Where a roll-over to CSS includes an employer component, the member can elect to have the roll-over amount treated as a transfer value. The employer component of the transfer value can be transferred to the Consolidated Revenue Fund (CRF). This increases the period of contributory service which counts towards the value of the indexed pension.

In this case the taxpayer made this election and the employer component of $87,000 was transferred to the CRF in return for an additional period of contributory service.

The rest of the transfer value will be paid to the taxpayer on retirement as other benefits which are not the subject matter of this ATO ID.

Subsection 307-200(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that regulations may specify that a superannuation interest can be treated as two or more superannuation interests in certain circumstances.

Subsection 307-200(3) of the ITAA 1997 provides that the regulations may also specify a way of treating a superannuation interest in relation to the element taxed in the fund and the element untaxed in the fund.

Regulation 307-200.03 of the Income Tax Assessment Regulations (ITAR 1997) deals with the circumstances in which an interest in a public sector superannuation scheme is to be treated as two or more superannuation interests.

Under subsection 995-1(1) of the ITAA 1997 a 'public sector superannuation scheme' has the same meaning as in the Superannuation Industry (Supervision) Act 1993 (SIS Act). Under subsection 10(1) of the SIS Act a 'public sector superannuation scheme' includes a scheme for the payment of superannuation, retirement or death benefits established under the law of the Commonwealth. The CSS is established under the Superannuation Act 1976 , being a law of the Commonwealth.

Sub-subregulation 307-200.03(2)(a) of the ITAR 1997 provides that if the superannuation benefit to be paid is sourced partly from contributions made into a public sector superannuation scheme or earnings on those contributions and partly from one or more other sources it is to be treated as two superannuation interests.

The Commissioner considers that if the origin of part of an indexed pension, so far as the superannuation scheme is concerned, is contributions to the scheme from accruals in other taxed funds, then that part of the pension should be treated as sourced from those contributions.

This differs from the case where contributions that are made during employment with the Commonwealth partly fund an additional non-indexed pension or the lump sum commutation of that pension.

While the standard indexed pension will all be paid from consolidated revenue, the Commissioner considers that the pension is sourced partly from contributions made into the scheme (the employer component of $87,000) which was converted into a credit of additional contributory service.

The fact that sub-subregulation 307-200.03(2)(a) of the ITAR 1997 allows for contributions or earnings as a source is taken to indicate that the contributions made into the scheme need not give rise to earnings in the scheme. Therefore, while sub-subregulation 307-200.03(3)(a) allows for the possibility of contributions and earnings as a source it does not require that the source necessarily be contributions that can produce earnings in the fund.

Subregulation 307-200.03(2) of the ITAR 1997 requires that the interest supporting the standard indexed pension payable to the taxpayer be treated as two separate interests.

Under subregulation 307-200.03(3) of the ITAR 1997, the two interests of the taxpayer are: • a 'contributions' interest consisting of contributions made into the CSS scheme that were converted to a credit of additional contributory service (the employer component of $87,000); and • a 'remainder' interest consisting of the remainder of the amount sourced from the Commonwealth.

Section 307-210 of the ITAA 1997 provides that the tax free component of a superannuation interest includes the contributions segment and the crystallised segment. Under section 307-215 of the ITAA 1997 the taxable component of a superannuation interest is the value of the interest less the tax free component of the interest.

Subsection 307-295(2) of the ITAA 1997 provides that if a superannuation benefit is not sourced to any extent from contributions made into a superannuation fund or earnings on such contributions, the benefit will consist wholly of an element untaxed in the fund.

The remainder interest does not have a crystallised segment in accordance with subsection 307-225(3) of the ITAA 1997. Therefore all benefits paid from the remainder interest will consist of an element untaxed in the fund in accordance with subsection 307-295(2) of the ITAA 1997.

For the contributions interest, if the crystallised segment was not determined as at 30 June 2007, the components of the crystallised segment of this interest will need to be determined by ComSuper in accordance with section 307-225 of the ITAA 1997.

There could be a crystallised segment if the taxpayer had a pre-July 83 component. This could be the case if the taxpayer had any pre-July 83 service in accordance with paragraph 307-225(2)(e) of the ITAA 1997.

The taxable component of the contributions interest is the total interest less any tax free component.

It will be necessary to determine the proportions of each indexed pension payment that is paid from the contributions interest and the remainder interest.

To calculate the proportions of each indexed pension payment paid from the two interests, it will be necessary for the total value of the two interests supporting the indexed pension to be determined as at the commencement date of the pension, as required by paragraph 307-125(3)(a) of the ITAA 1997.

The method of valuing the combination of the two interests supporting the indexed pension payable to the taxpayer is set out in regulation 307-205.02B of the ITAR 1997 and is: • if the public sector superannuation scheme had a practice for valuing the indexed pension payable to the member in use immediately before 28 June 2007, by using that practice; or • otherwise, by using the method set out in subregulation 307-205.02(2) of the ITAR 1997.

The proportion of each benefit paid from each interest will then be determined using the following method: • let the combined value of the two interests supporting the indexed pension at its commencement date be $X. • the value of the contributions interest is equal to the amount of the employer component of the transfer value, that is, $87,000. • the proportion of each indexed pension payment that is paid from the contributions interest will be equal to ($87,000 / $X). • the proportion of each indexed pension payment that is paid from the remainder interest will be [1 - ($87,000 / $X)].

The proportion of each indexed pension payment that is paid from the remainder interest will consist of element untaxed in the fund only.

The proportion of each indexed pension payment that is paid from the contributions interest will comprise a taxable component made up of an element taxed in the fund or that taxable component and a tax free component.

According to the proportioning rule in section 307-125 of the ITAA 1997, when a superannuation income stream benefit is paid from a superannuation interest the benefit will include tax free and taxable components calculated in the same proportion that these components make up the total value of the superannuation interest.

Therefore, the proportion of each indexed pension payment that is paid from the contributions interest must be divided between the tax free component (if any) and the element taxed in the fund in the same ratio as in the contributions interest at the commencement date of the indexed pension, where the ratios are as follows: • the ratio of tax free component of the original contributions interest is (crystallised segment / $87,000) and • the ratio of element taxed in the fund of the original contributions interest is [1 - (crystallised segment / $87,000)]

Date of Amendment Part Comment 2 April 2015 Facts Updated for clarity

Date of Amendment | Part | Comment

2 April 2015 | Facts | Updated for clarity