Complying Superannuation Fund: roll-over superannuation benefit treated as assessable income when applying deduction provisions - meaning of contribution

Is a roll-over superannuation benefit a 'contribution' for the purposes of subsection 295-95(1) of the Income Tax Assessment Act 1997 (ITAA 1997), the full amount of which is treated as if it were included in the 'assessable income' of a complying superannuation fund when applying the provisions of 'this Act about deducting amounts'?

Yes. A roll-over superannuation benefit (other than an amount transferred from one superannuation interest in a superannuation plan to another superannuation interest in the same plan) is a 'contribution' for the purposes of subsection 295-95(1) of the ITAA 1997.

The full amount of such a roll-over superannuation benefit is therefore treated as if it were included in the assessable income of the complying superannuation fund when applying the provisions of 'this Act about deducting amounts'.

During the 2009-10 income year, a complying superannuation fund received several 'roll-over superannuation benefits' within the meaning of section 306-10 of the ITAA 1997 from other complying superannuation funds.

The fund was only required to include a small part of the roll-over superannuation benefits in its assessable income for that income year under section 295-190 of the ITAA 1997.

The complying superannuation fund engages the services of a fund administrator.

The fund administrator processes contributions, roll-over superannuation benefits and manages investments on behalf of the trustee of the complying superannuation fund.

The fund administrator charges a set fee (the administrative fee) for its services.

The complying superannuation fund did not directly incur any expenses in obtaining the roll-over superannuation benefits. Rather, these expenses were directly incurred by the fund administrator and factored into the calculation of the administrative fee.

During the income year, the complying superannuation fund also earned exempt income (but no non-assessable non-exempt income). The fund was therefore not entitled to a deduction for the full amount of the administrative fee.

The administrative fee could not be divided into two distinct and severable parts, one attributed to gaining or producing the fund's assessable income, and one to gaining or producing the fund's exempt income.

The complying superannuation fund uses the method in paragraph 8(b) of Taxation Ruling TR 93/17 Income tax: income tax deductions available to superannuation funds to work out the proportion of the administrative fee that can be deducted from the fund's assessable income.

The trustee of the complying superannuation fund has asked whether a roll-over superannuation benefit is a 'contribution' that is treated as if it were included in the fund's assessable income under subsection 295-95(1) of the ITAA 1997 for the purposes of working out the deductible portion of the administrative fee under section 8-1 of the ITAA 1997.

Division 295 of the ITAA 1997, which applies for the 2007-08 and later income years, sets out the special rules for the taxation of superannuation entities, including complying superannuation funds. Amongst other things, these rules specifically include certain 'contributions' in the assessable income of a complying superannuation fund. They also modify the application of certain provisions of the ITAA 1997 about income and deductions.

Subdivision 295-C of the ITAA 1997 explains which 'contributions' are included in the assessable income of a complying superannuation fund (that is, which contributions are included in, and in some cases excluded from, a fund's assessable income).

The rules in Subdivision 295-C of the ITAA 1997 are subject to Subdivision 295-D of the ITAA 1997, which gives a complying superannuation fund the option of reducing the amount of certain contributions that would otherwise be included in its assessable income.

As detailed in section 295-155 of the ITAA 1997, the Guide to Subdivision 295-C of the ITAA 1997, there are three main types of 'assessable contributions': those made by a contributor on behalf of someone else; those made by a contributor on their own behalf for which they are entitled to a deduction; and those transferred from a foreign superannuation fund to an Australian superannuation fund. However, there are some additions and exceptions.

A 'roll-over superannuation benefit' that an individual is taken to receive under section 307-15 of the ITAA 1997 is included in the assessable income of a complying superannuation fund under Subdivision 295-C of the ITAA 1997, but only to the extent referred to in items 2 and 2A of the table in subsection 295-190(1) of the ITAA 1997.

In accordance with section 8-1 of the ITAA 1997, a complying superannuation fund can generally only deduct from its assessable income a loss or outgoing to the extent that it is incurred in gaining or producing its assessable income.

Subsection 295-95(1) of the ITAA 1997 modifies the application of the deduction provisions in 'this Act' for 'contributions' made to a complying superannuation fund. The phrase 'this Act' is defined to include the ITAA 1997 and the Income Tax Assessment Act 1936 (ITAA 1936).

Under subsection 295-95(1) of the ITAA 1997 'all contributions' made to a complying superannuation fund are treated as if they were included in the fund's assessable income for the purposes of working out the amount of any deductions (whether or not the contributions are actually included in the assessable income of the fund under the income tax law).

Subsection 295-95(1) of the ITAA 1997 relevantly states: Provisions of this Act about deducting amounts apply to these entities as if all contributions made to them were included in their assessable income: (a) complying superannuation funds... (emphasis added)

As explained in the notes to subsection 295-95(1) of the ITAA 1997, this means that a complying superannuation fund can deduct amounts incurred in obtaining all 'contributions', including non-assessable contributions (for example, contributions which the contributor cannot deduct, and contributions excluded from assessable income under Subdivision 295-D of the ITAA 1997). That is, the provision ensures it is not necessary for a fund to consider whether a particular contribution is assessable income, or is assessable income only in part.

It also follows that any losses or outgoings directly incurred by a fund in obtaining 'contributions' do not need to be apportioned for the purposes of section 8-1 of the ITAA 1997 where they are incurred in obtaining both assessable and non-assessable contributions (including a single contribution that has both an assessable and non-assessable portion).

Further, to the extent to which it is necessary for a fund to apportion losses or outgoings incurred in gaining or producing both assessable income and exempt income under section 8-1 of the ITAA 1997, such as the administrative fee in this case, all contributions are taken to be included in the fund's assessable income when working out the deductible portion.

Subsection 295-95(1) of the ITAA 1997 is a re-write of section 277 of Part IX of the ITAA 1936, which treated certain contributions as assessable income of a resident superannuation fund for the 1988-89 income year and all subsequent income years prior to the 2007-08 income year.

As it existed immediately before it was repealed, section 277 of the ITAA 1936 provided that, in determining the deductions allowable from the assessable income of a resident superannuation fund, 'any amount that is paid to the [fund] as mentioned in subsection 274(1)' of the ITAA 1936, 'or is a contribution to which subsection 82AAT(1) [of the ITAA 1936] applies, is taken to be assessable income of the [fund] (whether or not it is a taxable contribution)'.

The Explanatory Memorandum (EM) to the Tax Laws Amendment Bill (No. 4) 1994, which inserted this version of section 277 of the ITAA 1936, stated that resident superannuation funds would 'be entitled to a deduction for the cost of collecting all contributions'. However, whilst some amounts were clearly payments mentioned in subsection 274(1) of the ITAA 1936 or contributions to which 82AAT(1) of the ITAA 1936 applied, some were not. Accordingly, it was not clear which 'payments' or 'contributions' were actually covered by the words in the provision, and therefore to what extent expenses were deductible to the fund.

Subsection 295-95(1) of the ITAA 1997 was re-written to clarify how the law operated under former section 277 of the ITAA 1936 and give full effect to the policy intent of the provision as originally drafted. The EM to the Taxation Laws Amendment Bill (No. 6) 1988 stated the intention of former section 277 of the ITAA 1936 was to ensure that 'the receipt of non-taxable contributions [would] not reduce the extent of the deductibility of expenditure incurred in gaining contributions'.

Paragraph 3.85 of the EM to the Tax Laws Amendment (Simplified Superannuation) Bill 2006, which introduced subsection 295-95(1) of the ITAA 1997, clearly states that 'superannuation entities can deduct amounts incurred in obtaining contributions even if the contributions are not assessable'. Paragraph 3.86 of the EM goes on to state the 'rewritten section ... clarifies that the provision applies to all contributions that are not assessable'.

As subsection 295-95(1) of the ITAA 1997 clearly operates in respect of 'all contributions' made to a complying superannuation fund, it therefore falls for consideration whether or not a 'roll-over superannuation benefit' is a 'contribution' for the purposes of the provision.

The term 'contribution' is not defined in the ITAA 1997 and is therefore given its ordinary meaning, having regard to the context and purpose of the provision in which it appears.

Taxation Ruling TR 2010/1 Income tax: superannuation contributions sets out the Commissioner's view on the ordinary meaning of the word 'contribution' in so far as it is used in relation to a superannuation fund, approved deposit fund or retirement savings account in the ITAA 1997. Paragraph 4 of the Ruling relevantly provides: In the superannuation context, a 'contribution' is anything of value that increases the capital of the superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

The Ruling goes on to state at paragraph 17 that a roll-over superannuation benefit (other than an amount transferred from one superannuation interest in a superannuation plan to another superannuation interest in the same plan) is a 'contribution' as 'it increases the capital of the fund in the same way as any other transfer of funds or assets and is made to obtain superannuation benefits for a particular individual'.

There is nothing in subsection 295-95(1) of the ITAA 1997, or the EM to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 which introduced the provision, that suggests the word 'contribution' is intended to be given a contrary or a more limited meaning in this context, or that it is meant to exclude a roll-over superannuation benefit.

The broader legislative scheme of Part 3-30 of the ITAA 1997, which contains the superannuation provisions of the Act including subsection 295-95(1) of the ITAA 1997, clearly contemplates that a roll-over superannuation benefit is a 'contribution'.

For example, provisions of this Part include rules which: • ensure a deduction cannot be claimed for a contribution that is a roll-over superannuation benefit (see paragraph 290-5(a) of the ITAA 1997) • exclude a contribution that is a roll-over superannuation benefit from the definition of non-concessional contributions for the purposes of the excess contributions tax (see subparagraph 292-90(2)(c)(vi) of the ITAA 1997) • exclude a contribution that is a roll-over superannuation benefit from being assessable income under items 1 and 2 of the table in section 295-160 of the ITAA 1997, and • disregard the taxable component of a roll-over superannuation benefit paid into a superannuation interest when determining the contributions that are included in the 'contributions segment' of an interest under subsection 307-220(1) of the ITAA 1997 (see subparagraph 307-220(2)(a)(i) of the ITAA 1997).

These examples lend support for the view that the word 'contribution' as it is used in subsection 295-95(1) of the ITAA 1997 is intended to be given its ordinary meaning, and therefore includes a roll-over superannuation benefit to the extent specified in Taxation Ruling 2010/1. Furthermore, if a contrary legislative intention did exist, it is reasonable to expect that it would be expressly stated.

As established above, subsection 295-95(1) of the ITAA 1997 clearly extends the operation of the deduction provisions so that superannuation entities, including complying superannuation funds, can deduct amounts incurred in obtaining 'all contributions'. That is, its purpose is to ensure that the receipt of non-assessable contributions does not reduce the extent to which a fund can deduct expenditure incurred in obtaining contributions.

In the Commissioner's view, it is consistent with the policy intention underpinning subsection 295-95(1) of the ITAA 1997 that a complying superannuation fund can deduct losses and outgoings incurred in obtaining a roll-over superannuation benefit in its entirety (not just the assessable part).

In the absence of a contrary legislative intention, and consistent with the view expressed in Taxation Ruling TR 2010/1, a roll-over superannuation benefit (other than an amount transferred from one superannuation interest in a superannuation plan to another superannuation interest in the same plan) is a 'contribution' for the purposes of subsection 295-95(1) of the ITAA 1997.

In this case, it follows that the full amount of all roll-over superannuation benefits received by the complying superannuation fund are treated as if they were included in the 'assessable income' of the fund under subsection 295-95(1) of the ITAA 1997 when applying the provisions of 'this Act about deducting amounts', including section 8-1 of the ITAA 1997.

Date of Amendment Part Comment 6 March 2015 Reasons for Decision Updated due to repeal of legislation. Legislative References Updated.

Date of Amendment | Part | Comment

6 March 2015 | Reasons for Decision | Updated due to repeal of legislation.

Legislative References | Updated.