Australian Taxation Office consultation regarding proposed interpretation of sections 307-5, 307-15 and 306-10 of ITAA National Tax Liaison Group, Australian Taxation Office Submission by the Superannuation Committee of the Law Council of Australia 31 May 2011 GPO Box 1989, Canberra ACT 2601, DX 5719 Canberra 19 Torrens St Braddon ACT 2612 Telephone +61 2 6246 3788 Facsimile +61 2 6248 0639 Law Council of Australia Limited ABN 85 005 260 622 www.lawcouncil.asn.au
Submission in response to Australian Taxation Office consultation regarding proposed interpretation of sections 307-5, 307-15 and 306-10 of ITAA 97 regarding payment of a member s benefit when one fund is merged with another The Superannuation Committee of the Law Council of Australia has been asked by the Commissioner via the NTLG for its views in relation to the interpretation of law concerning whether there is a payment of a member s benefits when one superannuation fund is merged with another. In particular, this concerns the application of the proportioning rule and the interpretation of sections 307-5, 307-15 and 306-10 of the Income Tax Assessment Act 1997 (ITAA97). The Committee has been asked for its views as to: (1) (legal reasoning) the legal reasoning as to why there is no payment of a superannuation benefit for the benefit of a member and therefore no roll-over superannuation benefit when a merger of superannuation funds occurs; and (2) (potential consequences) any analysis that the Committee may be able to provide as to the consequences that would arise if the Commissioner were to conclude that there is a payment of a superannuation benefit triggering the proportioning rule. Legal reasoning The Committee notes that the Commissioner is now considering changing his views on this issue from those previously expressed in ATO Class Ruling 2001/47 regarding the predecessor provisions under section 27A(3) of the Income Tax Assessment Act 1936. For the reasons set out below the Committee prefers the views originally expressed by the Commissioner in the Class Ruling to the effect that in a successor fund transfer or merger of funds there is no payment made for a taxpayer s benefit. In the Committee s view the position is clear from the construction of section 307-15(2) of ITAA97 that the payment must be a payment made to and in respect of the particular member and if it is not a payment made for the member s direct benefit then it must be made at the direction or request of the member. It is clear that this provision is targeted towards the payment of a benefit upon the crystallisation of an entitlement and does not contemplate a wholesale transfer or payment of members benefits made in the context of a merger of funds. In the circumstances of a merger or successor fund transfer (SFT) there is not a benefit payment as such, but a wholesale transfer of assets to a successor fund in which the successor fund is required to recognise each transferred member as having equivalent rights to benefits as the transferred member had under the transferor fund. The SFT process is not sufficient to constitute a payment of a benefit for the purposes of section 307-15(2). Whilst the Committee acknowledges that the definition of successor fund under regulation 1.03(1) of the Superannuation Industry (Supervision) Regulations refers to a member s benefits being transferred from one fund to another fund, it does not contemplate the crystallisation of those entitlements and envisages the member being maintained in the successor fund in the same position as the member would have been had he or she remained in the transferor fund. In this sense an SFT provides for the continuity of members benefit entitlements. Further, the Committee considers that the requirement under section 307-15(2)(a) for the payment to be made for the benefit of a member would not be satisfied in an SFT context. A trustee of a transferor fund may determine to merge the fund with another fund (being the successor fund) on the basis that it will be generally advantageous for the members of the fund as a whole. However, it is likely that in many cases there will be members transferred who may not be directly or individually advantaged by the transfer Australian Taxation Office consultation regarding proposed interpretation of sections 307 Page 2
in fact, in some cases, some members may perceive that they have, at a personal or individual level, been disadvantaged by the merger (whether in a tangible or intangible way). For example, the manner in which a total and permanent disability definition might apply to a member in particular circumstances under the successor fund may disadvantage a particular member, though the insurance arrangements may be considered overall to be advantageous to the general membership. Given the possibility of these kinds of examples applying in all fund mergers it is difficult to accept that section 307-15(a) and the reference to there being a benefit for a member under that provision - was ever intended to apply to transfers or payments made in the context of a fund merger. The Committee notes that section 307-15(b) would not have application to an SFT because it requires the payment to be made at the direction or request of the member which request or direction is neither sought nor required in an SFT scenario. The Committee also notes that the Commissioner s revised views are not supported by anything in the explanatory memorandum to Taxation Laws Amendment (Simplified Superannuation) Bill 2006. Potential consequences From a legal perspective the Committee is concerned that the application of the proportioning rule to an SFT may cause trustees to reconsider any fund merger on the basis that there is potential for members to be adversely affected by crystallisation of the tax free component of their benefits. This is particularly likely to be the case where members may have suffered adverse investment performance in recent years which would be locked in to the components of their benefits if the proportioning rule is to be applied to fund mergers. Thus, the application of the proportioning rule would represent another factor to be taken into account and investigated when a trustee assesses whether a proposed fund merger is in the interests of members. In funds where there has been exposure to poor investment performance over recent years the consequences of the application of the proportioning rule may of itself be sufficient for the trustees to decide not to proceed with a merger. In addition, there is a question mark over whether such adverse consequences could impact on the trustees of both funds being satisfied that the equivalency test for SFT purposes has been satisfied and therefore whether a merger can take place. Further, and again from a legal perspective, there is the potential exposure for trustees to claims by members who are disadvantaged by the application of the proportioning rule as a consequence of a fund merger. Again, this is likely to be an additional reason as to why trustees may be reluctant to give effect to a merger where members may be disadvantaged by the merger triggering the application of the proportioning rule. From a practical perspective the Committee would also expect there to be a significant additional administration burden for funds in calculating these crystallised components as at the transfer date if the proportioning rule were to be applied. * * * * Please contact the Committee if you have any further questions arising from its views as set out above. The Committee confirms that it is happy for this submission to be circulated to other members of the National Tax Liaison Group (Superannuation Technical Sub-Group). Australian Taxation Office consultation regarding proposed interpretation of sections 307 Page 3
Attachment A: Profile of the Law Council of Australia The Law Council of Australia is the peak national representative body of the Australian legal profession. The Law Council was established in 1933. It is the federal organisation representing approximately 50,000 Australian lawyers, through their representative bar associations and law societies (the constituent bodies of the Law Council). The constituent bodies of the Law Council are, in alphabetical order: Australian Capital Territory Bar Association Bar Association of Queensland Inc Law Institute of Victoria Law Society of New South Wales Law Society of South Australia Law Society of Tasmania Law Society of the Australian Capital Territory Law Society of the Northern Territory Law Society of Western Australia New South Wales Bar Association Northern Territory Bar Association Queensland Law Society South Australian Bar Association Tasmanian Bar Association The Victorian Bar Inc Western Australian Bar Association LLFG Limited (a corporation with large law firm members) The Law Council speaks for the Australian legal profession on the legal aspects of national and international issues, on federal law and on the operation of federal courts and tribunals. It works for the improvement of the law and of the administration of justice. The Law Council is the most inclusive, on both geographical and professional bases, of all Australian legal professional organisations. Australian Taxation Office consultation regarding proposed interpretation of sections 307 Page 4