Death Benefit Structuring - Proportioning Rule Paper SPAA

Keeping it in proportion The architecture of superannuation interests

11 March 2008

David Moss Principal, Tax & Superannuation Deloitte Growth Solutions Pty Limited

Direct Line: 02 9322 5479 Email: [email protected]

David Moss Direct Line: 02 9322 5479 Email: [email protected] 2

Contents Pre 30 June 2007 - Superannuation benefit payment structuring 3

Post 1 July 2007 – Changes to the superannuation regime 5

Application of the proportioning rule 7

Issues with the application of the proportioning rule 9

Implications of the ‘proportioning rule’ and benefit structuring 10

Extracts from Legislation in relation to superannuation interests 16

Extracts from Regulations in relation to superannuation interests 19


Pre 30 June 2007 - Superannuation benefit payment structuring Prior to 1 July 2007, upon an individual receiving payment of a superannuation benefit they were able to select which components would make up that benefit. A member’s balance with a superannuation fund could include undeducted, CGT concessional, invalidity, taxable and a variety of other component types.

As a result, at the time of providing the trustee of a superannuation fund with a request to make payment of benefits, the member could consider their personal income tax position and the make up of their superannuation benefit components to ensure they obtained an optimal result in relation to their overall personal tax and financial affairs.

Example

Member 1 of ABC Superannuation Fund has superannuation benefits consisting of the following components at 30 June 2003 and an Eligible Service Period of 1 July 2000:

• Undeducted component $200,000

• Taxable component $200,000

Should the member be eligible to do so and wish to withdraw a $200,000 lump sum with a minimum level of taxation, they were able to select that the payment be made out of the undeducted component and achieve this objective by receiving an entirely tax free benefit.

Alternatively should that individual be over 55 years of age and still have $100,000 of their Post 30 June 1983 tax free threshold unused, they could select that $100,000 of the payment be made out of the taxable portion of their benefit and $100,000 out of the undeducted component. This option would also achieve their objective, with the entire benefit again being received tax free.

Another alternative would be available should the eligible service period attributed to the individual in the superannuation fund in fact be 1 July 1973. Selecting that the taxable portion of the benefit be $166,673 and the undeducted component $33,327, may result in the benefit being received with a minor amount of tax being payable, $1,617.

(Pre 30 June 1983 component = $200,000 x 3,653 days/10,958 days = $66,673)

(Tax payable on Pre 30 June 1983 component = $66,673 x 5% x 48.5% marginal tax rate = $1,617)

As the above examples demonstrate, prior to 1 July 2007 it was possible for a member of a superannuation fund to manage the drawing of their benefits to achieve the most tax effective outcome for themselves at the time. In addition the selective use of differing components of their superannuation balance could also ensure that the balance remaining in the fund continued to consist of components that would maximise the ability to make tax effective payments into the future.

In summary under the old Pre 30 June 2007 rules, benefit payments from superannuation could be managed with a variety of strategies to ensure that the minimum level of taxation would be payable, including through the following arrangements:

• individuals with large undeducted components had the ability to draw amounts out of superannuation from this component tax free as desired

• individuals with Pre 30 June 1983 eligible service period dates that extended for many years and unused Post 30 June 1983 tax free threshold amounts, could potentially


withdraw hundreds of thousands of dollars with minimal tax being payable, relating to the Pre 30 June 1983 amount at a maximum effective tax rate of approximately 2.3%

• individuals with a combination of undeducted amounts, unused Post 30 June 1983 tax free threshold amounts, Pre 30 June 1983 eligible service period date and other superannuation component types, could access potentially millions of dollars in superannuation benefits over time whilst still being subject to minimal levels of taxation

The application of these rules applied not just to the payment of lump sums but also to superannuation pension benefits. The principles of being able to select from the various components of an individual’s superannuation benefits in the above examples also carried over to the payment of pension benefits in much the same way, however the taxation implications differed.

Example

Member 2 of ABC Superannuation Fund has superannuation benefits consisting of the following components at 30 June 2003 and an Eligible Service Period of 1 July 1973:

• Undeducted component $200,000

• Taxable component $200,000

Should the member be eligible to do so and wish to set aside $200,000 for the commencement of an allocated pension, they were able to select that the payment be made out of all or part of the undeducted component and/or the taxable component.

The greater the undeducted component, the greater the amount of the pension that may be received annually tax free. The eligible service period relating to the benefit payment would have no impact on the taxing of pension payments. Taxation of the pension payment would be dependent on the undeducted component (and other concessional components), the individual’s marginal tax rate and Reasonable Benefit Limit position.


Post 1 July 2007 – Changes to the superannuation regime From 1 July 2007 significant changes apply to how the superannuation regime operates in Australia. The most significant of these changes include:

• a member’s superannuation account balance is now divided into three components, being ‘tax free’, ‘taxable element taxed’ and ‘taxable element untaxed’. (A ‘taxable element untaxed’ component is less common in Self Managed Superannuation Funds and is assumed not to be relevant in the following discussion unless specifically mentioned.)

• caps on the amounts that it is tax effective for an individual to contribute into

superannuation on a yearly basis in the form of taxable and tax free amounts • benefit payments to individuals 60 years of age or over are generally received tax free

• the taxable component of benefit payments to individuals between 55 and 60 years of

age are effectively taxed at 16.5% for lump sums and marginal rates less a 15% rebate for pensions - the tax free component is received tax free

• individuals are no longer able to select what components make up a superannuation

benefit payment (i.e. taxable or tax free) and the components must now instead be calculated at the time of payment under what is known as the ‘proportioning rule’

Other changes and points of interest include:

• Although benefit payments to individuals 60 years of age and over may be tax free, this is not the case for benefit payments made upon the member’s death to non-dependents, such as adult children. The applicable tax rates are:

o taxable element taxed component is taxable at 15% plus 1.5% Medicare Levy

o taxable element untaxed component is taxed at a maximum of 30% on the first $1,000,000 and marginal tax rates on the balance

o tax free component is received tax free

The result of the above is that where an individual expects it is likely that their superannuation benefits will be received by a non-dependent upon their death and a taxable component will be included in a death benefit payment, there is an incentive for the individual to seek to reduce their taxable benefits and increase their tax free benefits prior to death. This incentive is also in place where an individual expects to access their superannuation benefits prior to age 60, however there are limited opportunities for an individual in this situation to manage the make-up of their benefit components. The primary objective of the proportioning rule is to limit the planning that an individual may undertake in relation to their current superannuation benefits to purposefully increase their tax free component and reduce their taxable component over time. This in turn limits the individual from reducing the tax that may potentially be payable upon their death, should their superannuation benefits be paid as a death benefit to non-dependents, such as adult children.


Should an individual aged 60 years or over be certain that they will fully utilise their superannuation benefits prior to death or should they not be concerned about the potential tax liability that may arise and be payable by their estate or beneficiaries upon their death, they may not be concerned with the application of the proportioning rule. This is because the proportioning rule will not have any impact on that member personally during their lifetime, as being aged 60 or over the benefit payments they receive will be tax free going forward regardless.


Application of the proportioning rule Upon a member of a superannuation fund commencing to receive a benefit payment, the proportioning rule applies. The first step in applying the proportioning rule is to determine the proportion of the benefit that will consist of a tax free component and the proportion that will consist of a taxable component. These components are themselves dependent upon the make-up of the ‘superannuation interest’ from which the benefit payment is being made.

REGULATION 307-200.02 MEANING OF SUPERANNUATION INTERESTS For subsection 307-200(2) of the Act, every amount, benefit or entitlement that a member holds in a self-managed superannuation fund is to be treated as 1 superannuation interest in the superannuation fund unless the amount, benefit or entitlement is to be treated as 2 or more superannuation interests in accordance with 1 of the other arrangements in this Subdivision.

REGULATION 307-200.05 MEANING OF SUPERANNUATION INTERESTS — TREATING A SUPERANNUATION INTEREST AS 2 OR MORE SUPERANNUATION INTERESTS (SUPERANNUATION INCOME STREAMS) If a superannuation income stream commences, an amount that supports the superannuation income stream is always to be treated as a separate superannuation interest.

Based on the above regulations, a self managed superannuation fund is considered to hold one superannuation interest per member, unless a pension has been commenced. A superannuation income stream is treated as a separate interest from immediately after the income stream commences. As a result, for example, where a member commences two pensions and continues to contribute into the superannuation fund, at any given time they may have three superannuation interests, being one for each pension and one for the accumulation balance.

Example: Pension 1 commences 1 July 2007 with a value of $100,000, based on a $200,000 balance within the superannuation fund. Pension 1 is considered a separate interest to the remaining accumulation balance. Should another pension commence with a balance of $50,000 on 1 August 2007, the result would be three separate interests in the SMSF.

Once the value and components of the superannuation interest have been determined, the type of payment to be made needs to be decided i.e. lump sum or pension. This will determine at what time the proportioning calculation should be done in respect of the superannuation interest.

307-125(3) For the purposes of subsection (2), determine the *value of the *superannuation interest, and the amount of each of those components of the interest, at whichever of the following times is applicable: (a) if the *superannuation benefit is a *superannuation income stream benefit — when the relevant *superannuation income stream commenced; (b) if the superannuation benefit is a *superannuation lump sum — just before the benefit is paid; (c) despite paragraphs (a) and (b), if the superannuation benefit arises from the commutation of a superannuation income stream — when the relevant *superannuation income stream commenced.


The proportioning calculation should then be performed in respect of the tax free component and taxable component. The tax free component is calculated with reference to the following:

SECTION 307-210 Tax free component of superannuation interest 307-210 The tax free component of a *superannuation interest is so much of the *value of the interest as consists of: (a) the *contributions segment of the interest; and (b) the *crystallised segment of the interest.

The contributions segment consists of non-concessional contributions made during the year and the crystallised segment consists of the following

(a) the concessional component; (b) the Post-June 1994 invalidity component; (c) the undeducted contributions; (d) the CGT exempt component; (e) the Pre-July 83 component. Note: If superannuation benefits have been paid from the superannuation interest, the amount of the tax free component of the interest will be reduced by the tax free components of those superannuation benefits: see section 307-125.

The taxable component is calculated with reference to the following: SECTION 307-215 Taxable component of superannuation interest 307-215 The taxable component of a *superannuation interest is the *value of the interest less the *tax free component of the interest.

Example:

A member of a self managed superannuation fund wishes to draw a lump sum benefit of $10,000. The value of the superannuation interest just before the lump sum payment is $200,000 and of this amount $50,000 is a tax free component and $150,000 is a taxable component. The percentage base of the superannuation interest is 25% tax free and 75% taxable. As a result, for the lump sum payment the benefit would consist of, $2,500 tax free and $7,500 taxable.

Where a member already has a pension in place at 30 June 2007, the proportioning rules will not automatically apply in respect of that pension. This may result in the crystallisation of the pre 30 June 1983 component being delayed and the old undeducted purchase price arrangements still having application in respect of any tax free component of the pension. The proportioning rules will only commence to apply once a trigger event occurs, such as:

• commutation in part or in full of the pension • death of the pensioner • having previously or after 1 July 2007 attaining 60 years of age


Issues with the application of the proportioning rule The application of the proportioning rule will bring with it some added complication for the superannuation system. In the short term one key issue will be how are benefit payments administered when they are not conveniently performed on 30 June of a year of income. Under the proportioning rule, should a lump sum payment be made on 11 November 2007, the superannuation fund will need to calculate the value and proportion of the tax free and taxable components as at that date. This will present a difficulty for self managed superannuation funds, in particular those that hold assets for which there is not a ready market and obtaining mid year valuations is difficult. Another interesting issue is the fact that the only self managed superannuation funds are treated as having only one superannuation interest for the application of the proportioning rule, with the exception of pension benefits which are each treated as additional separate interests. The implications of having this rule apply only to self managed superannuation funds is that members of large industry funds, master trusts and other non-self managed superannuation funds are able to have multiple superannuation interests within the one superannuation fund, potentially holding tax free and taxable benefits as separate superannuation interests without the need to make use of pensions. The reasoning behind this differentiation between self managed superannuation funds and other superannuation funds is that large superannuation funds would have difficulties potentially having to merge several accounts belonging to one member, should the member request a benefit payment and the trustee be required to calculate the relevant components of the payment. SPAA is currently discussing this issue with Treasury and is seeking to have self managed superannuation funds provided with an equal opportunity to also maintain more than one superannuation interest should they wish to do so. This view appears reasonable considering that Small APRA funds, corporate superannuation funds and other superannuation funds that would not have the same problem issue as industry funds and master trusts have also been provided with the advantage of being able to create more than one interest, whilst self managed superannuation funds have not.


Implications of the ‘proportioning rule’ and benefit structuring As noted previously, the application of the proportioning rule means that members of a superannuation fund are no longer able to select that a taxable component, or tax-free component only, should make up a benefit payment. Instead when a benefit payment is made from a superannuation interest the components of the benefit must be calculated at that time based on the proportion making up the superannuation interest as a whole. It was also noted that a member of a self managed superannuation fund in accumulation mode has a single superannuation interest. Should they commence one or more pensions from part of their superannuation benefits, doing so creates new separate superannuation interests, being each of the pensions, and maintains the existing superannuation interest, being the accumulation balance. In addition, a pension that was commenced prior to 30 June 2007 is also in itself a separate superannuation interest. Despite the restrictions placed on self-managed superannuation funds under the proportioning rule, the ability to establish separate superannuation interests does result in the restoration of some level of flexibility. The following points detail the results of applying the proportioning rule to superannuation interests, as well as common scenarios that may occur in self-managed superannuation funds in the post 1 July 2007 environment. 1) Separate tax free superannuation interests

With the introduction of the proportioning rule, and the continuation of tax being payable upon the payment of death benefits to non-dependents, people have been seeking to increase the level of their benefits that consist of a tax free component. The most effective way of starting this process is the commencement of a superannuation pension that consists of 100% tax free component. There are two methods that a 100% tax free pension may have been commenced. The first is where, prior to 30 June 2007, a member of a superannuation fund may have commenced a pension and requested that the components consist only of benefits that would form part of a tax free component from 1 July 2007. The most common such components would include undeducted contributions and the pre 30 June 1983 amount of a taxable component. However, other amounts such as the CGT concession component would also fall into this category.

Example Member 3 of ABC Superannuation Fund wishes to commence a 100% tax free pension on 30 June 2007. They have a balance in their self-managed fund of $600,000, an eligible service period commencing 1 July 1973 (total days at 30/6/07 12,418, pre 30 June 1983 days 3,652) and the following components making up their overall balance with the fund:

• Undeducted component $150,000 • Taxable component $450,000


A pension using only the undeducted contributions could be commenced using $150,000. However, to maximize the tax free pension, the member may instead commence a pension with $212,491. At 30 June 2007 the crystallisation calculation is performed in relation to the $212,491 pension and the pre 30 June 1983 component using the formula in the old section 27AA of ITAA 1936 noted below. The results of the calculation are that the crystallised amount equals the lesser of: $212,491 x 3,652 / 12,418 = $62,491 or $212,491 - $150,000 = $62,491 As a result, the sum of the crystallised amount and the undeducted component at 30 June 2007 is equal to 100% of the pension amount. This calculation has provided the member with the optimum pension commencement value that ensures that from 1 July 2007, under the proportioning rule the pension is 100% tax free. Note, however, that should a second pension be commenced on 1 July 2007 from the remaining balance of the member’s superannuation benefits, the application of the proportioning rule on this second pension would result in a total pension of $387,509. The tax free component would be $113,962 and the taxable component $273,547. This would result in 29% of this interest being tax free and 71% taxable.

In comparison, should a single pension have instead been commenced by Member 3 utilising the entire $600,000 on 1 July 2007, the proportioning rule would result in a tax free percentage of 54% and a taxable percentage of 46%. 27AA Components of an ETP (1) An ETP (other than an ETP referred to in subsection (4)) consists of one or more of the following components:

(a) the concessional component; (aa) the Post-June 1994 invalidity component; (b) the undeducted contributions; (c) in the case of an immediate annuity eligible termination payment—the non-qualifying component; (ca) the excessive component; (cb) the CGT exempt component; (d) the Pre-July 83 component, which is the lesser of the following amounts:

(i) the amount calculated using the formula: (ETP – C – IC – NQ – EC – CGT) x Pre-July 83 / Total period where: ETP is the amount of the ETP. C is the concessional component. IC is the Post-June 1994 invalidity component. NQ is the non-qualifying component. EC is the amount of the excessive component. CGT is the CGT exempt component. Pre-July 83 is the number of whole days (if any) in the eligible service period that occurred before 1 July 1983; and Total period is the number of whole days in the eligible service period.


(ii) the amount represented by the component: (ETP - C - IC - NQ - EC – CGT) in subparagraph (i), reduced by the undeducted contributions;

(e) the Post-June 83 component, which is the ETP reduced by the other components.

The second method that allows the commencement of a 100% tax free pension is based upon the making of non-concessional contributions post 1 July 2007. Such a contribution is made into a self-managed superannuation fund that either the member does not currently have an account with, or all the member’s current benefits form part of a separate pension superannuation interest. Upon the non-concessional contribution being received it will form part of a new accumulation interest. Should a new superannuation pension be commenced immediately using this amount, it will result in a new superannuation pension interest being formed, consisting of a 100% tax free component under the proportioning rule. The net result of both the first and the second method is that a separate superannuation interest is established in the form of a 100% tax free pension. It should be noted that under the Pre 30 June 2007 legislation the undeducted, tax free component of a member’s benefit was a fixed amount. It was reduced by benefit payment that included an undeducted component and only increased through additional undeducted contributions. Under the new rules from 1 July 2007 this is no longer the case and the tax free component may naturally increase over time with earnings. This is one of the great benefits of the proportioning rules.

2) Segregation of assets

Where a member has separate interests in a self-managed superannuation fund, the investments of the fund may be accounted for via two different methods. The first method is known as segregating assets and consists of allocating specific assets of the fund towards specific sections within it. Segregation of assets may occur at a number of levels in a fund, including; at the member level, at accumulation/pension fund level, or at the level of each particular pension interest within a fund.

Income and capital gains derived on particular assets of a fund may vary widely. Earnings derived on assets allocated towards the support of a superannuation pension are exempt from tax. Should a fund include a member who has previously commenced a superannuation pension that under the proportioning rule is 100% tax free, all future growth in this pension’s assets remain part of this 100% tax free superannuation interest. As a result, where the member segregates what they consider to be assets with higher growth and earning prospects towards the support of their 100% tax free pension, the income derived on these assets is tax free and the growth in the asset base of the pension assists in increasing the value of the 100% tax free pension in comparison to the remainder of the fund. The alternative side of this arrangement is that as higher growth assets are allocated to the 100% tax free pension, the remaining lower growth assets will be left to support the member’s other superannuation benefits in the fund including a taxable component. Their


reduced growth rate will result in a lower level of taxable superannuation benefits existing in the fund than would otherwise be the case and as a result, a lower level of tax potentially being payable by non-dependents upon the benefits payment out of the fund on the death of the member. Should the segregated asset approach not be used, what is known as the ‘proportional approach’ can be utilised (unrelated to the proportioning rule). The proportional approach may require an actuary to determine the proportion of the income derived by the fund for each year that relates to pensions versus accumulation benefits.

3) Reserving of income

Subject to the contents of the trust deed, the trustees of a superannuation fund have an ability to establish an investment earnings reserve, should they consider this to be appropriate. It is at their discretion to decide how much of a year’s income to reserve.

Upon the future distribution of the reserve, it will again be within the trustees’ discretion to determine which members and, potentially, which of their superannuation interests should be credited with the distributions. This may, over time, lead to the 100% tax free pension being increased to a greater extent than taxable components.

Note however that the trustees should ensure that they document the reasoning behind their decision making process and ensure that their actions fit within the fund’s investment strategy. In addition the application of reserves to a member’s account can, in some circumstances, be treated as a contribution for the purposes of the individual caps and as a result any potential allocation of reserves should be reviewed carefully before proceeding post 1 July 2007.

4) Pension payment requirements

Once a superannuation pension has commenced, there is a requirement that a minimum amount be withdrawn from the fund in the form of a pension on a yearly basis. Unless a transition to retirement pension has been commenced, there is no maximum on the amount that may be withdrawn. When an individual is aged 60 years or over and has previously commenced a 100% tax free pension, while a minimum yearly pension payment will be required, payments in addition to the minimum will only result in a reduction in the tax free benefits of the fund in comparison to the other taxable benefits of the fund. As a result, should drawings be desired in excess of the minimum pension requirements of the fund, sourcing these withdrawals from the taxable interests within the fund may be advantageous. Regardless of the sources of the benefit payments, the additional amounts will be received tax free in the hands of individuals aged 60 or over.

5) Additional contributions and recontributions

Should a member still be contributing to a superannuation fund on a yearly basis and/or be in receipt of minimum pension payments required in respect of current pensions and be recontributing the amounts back into the fund as the amounts are not needed, such amounts will be received by the fund as either concessional or non-concessional contributions. These amounts will be accumulation benefits unless they are utilised immediately to commence pensions.


Where the superannuation fund is entirely in pension mode prior to a non-concessional contribution being received, with one pension being a 100% tax free pension and the other pension consisting of the remainder of the fund, it may be possible to commute the 100% tax free pension on the date of the contribution and commence a new pension immediately. The result of these actions is to integrate the new contribution into a superannuation pension interest in the fund, whilst ensuring that it remains 100% tax free under the proportioning rule. Alternatively should concessional contribution be received and it is desired that the fund remain entirely in pension mode, it may be possible to commute the second pension on the date of the contribution and commence a new pension immediately.

However it should be noted that care should be taken when dealing with the commutation of such pensions. Only one form of contribution should be received on a given date and only one pension should be subject to commutation and a new pension commenced. Should an error occur in the process of managing a 100% tax free pension, all previous planning in this regard may come to nothing and be negated. For example if both pensions are commuted on the same day or two forms of contributions received and added to the current 100% tax free benefits, this may result in the proportioning rule preventing a 100% tax free pension from being re-established.

The opportunity to withdraw benefits from superannuation and recontribute them as non-concessional contributions is also an option for members aged 55 years or over. Transition to retirement pensions may assist in this regard. However, note that consideration needs to be given to the non-concessional contribution caps to ensure they are not breached in a given year.

Example Member 3 of ABC Superannuation Fund had previously commenced two pensions from a superannuation interest of $600,000 consisting of 100% tax free pension of $212,491 and a second pension of $387,509. During the year various events had occurred as noted below, resulting in the final balances remaining at the end of year one for each pension, based upon the member being 60 years of age, with a minimum pension payment requirement of 4%:

100% tax free pension second pension Balance 1/7/07 $212,491 $387,509 Minimum pension ($8,500) ($15,500) Additional pension ($0) ($10,000) Earnings 10% vs 5% $21,249 $19,375 Contributions $150,000 $100,000 Balance 30/6/08 $375,240 $481,384 As a result of the above, after one year and the commutation of each old pension and commencement of new pensions, the 100% tax free pension account has increased by $162,749 and the second pension has increased by only $93,875. After five years of similar transactions to the above the estimated balances would be as shown below. Should the individual not have commenced a separate tax free pension, segregated assets, managed pension payments and ongoing contributions, the tax free


portion of their superannuation benefits after five years would be expected to be significantly lower than the number below.

100% tax free pension second pension Balance 30/6/12 $1,129,924 $866,366

6) Anti-avoidance provisions

The Australian Taxation Office has clearly indicated that “the creation or manipulation of separate superannuation interests by way of blatant, artificial or contrived arrangements for the sole or dominant purpose of obtaining a tax benefit may attract the operation of Part IVA”. As a result, care should be taken when providing advice to a client in relation to the structuring of their superannuation benefits and the application of the proportioning rule.

As can be seen from the above, the proportioning rule does provide an added layer of complication to the functionality of the superannuation system and limits the planning available to members of self managed superannuation funds in respect of death benefit payments. However despite the restrictions, the ability to utilise superannuation pensions to establish separate superannuation interests can provide some measure of flexibility where appropriate planning is implemented on a regular basis.

David Moss Principal – Deloitte Growth Solutions Pty Limited David Moss is a Principal in the superannuation consulting division of Deloitte and has spent over 7 years working in the superannuation and international taxation fields. A large part of David’s role is being “an advisor to the advisors”, providing legislative and technical guidance to other accounting firms, financial advisors and professionals, who do not have time to become superannuation experts and like to present their clients with a specialist in the field working in partnership with them, to provide innovative solutions and structuring alternatives for their benefit. If you have a superannuation related matter that you like assistance with or a second opinion on, David would be happy to speak with you. He is contactable directly on 02 9322 5479 and [email protected].


Extracts from Legislation in relation to superannuation interests Income Tax Assessment Act 1997 SECTION 307-125 Proportioning rule 307-125(1) The object of this section is to ensure that the *tax free component and *taxable component of a *superannuation benefit are calculated by: (a) first, determining the proportions of the *value of the *superannuation interest that those components represent; and (b) next, applying those proportions to the benefit. 307-125(2) The *superannuation benefit is taken to be paid in a way such that each of those components of the benefit bears the same proportion to the amount of the benefit that the corresponding component of the *superannuation interest bears to the *value of the superannuation interest. 307-125(3) For the purposes of subsection (2), determine the *value of the *superannuation interest, and the amount of each of those components of the interest, at whichever of the following times is applicable: (a) if the *superannuation benefit is a *superannuation income stream benefit — when the relevant *superannuation income stream commenced; (b) if the superannuation benefit is a *superannuation lump sum — just before the benefit is paid; (c) despite paragraphs (a) and (b), if the superannuation benefit arises from the commutation of a superannuation income stream — when the relevant *superannuation income stream commenced. 307-125(4) Subsection (2) does not apply to a *superannuation benefit if any of the following applies: (a) the regulations specify an alternative method for determining those components of the benefit; (b) a determination under subsection (5) specifies an alternative method for determining those components of the benefit; (c) the Commissioner consents in writing to the use of another method for determining those components of the benefit. If so, use that method to determine those components of the benefit. 307-125(5) For the purposes of paragraph (4)(b), the Commissioner may determine, by legislative instrument, one or more alternative methods for determining those components of a *superannuation benefit. 307-125(6) If the *superannuation benefit is an *unclaimed money payment or a *small superannuation account payment, for the purposes of this section: (a) treat the benefit as a superannuation benefit paid from a *superannuation interest; and (b) treat the amount of the benefit as the *value of that superannuation interest just before the time the benefit is paid


Subdivision 307-D — Superannuation interests SECTION 307-200 Regulations relating to meaning of superannuation interests 307-200(1) In the circumstances specified in the regulations, treat a superannuation interest as two or more superannuation interests in the way specified in the regulations. 307-200(2) In the circumstances specified in the regulations, treat 2 or more superannuation interests as one superannuation interest in the way specified in the regulations. 307-200(3) Regulations for the purposes of this section may specify a way of treating a *superannuation interest in relation to one or more of the following aspects of the interest: (a) the *tax free component (and the *contributions segment and *crystallised segment relating to that component); (b) the *taxable component; (c) the *element taxed in the fund of the taxable component; (d) the *element untaxed in the fund of the taxable component. 307-200(4) Regulations for the purposes of subsection (1) may specify a way of allocating an amount relating to a *superannuation interest treated as two or more superannuation interests in accordance with those regulations to those interests. 307-200(5) Subsections (3) and (4) do not limit the regulations that may be made for the purposes of this section. SECTION 307-205 Value of superannuation interest 307-205 The value of a *superannuation interest at a particular time is: (a) if the regulations specify a method for determining the value of the superannuation interest — that value; or (b) otherwise — the total amount of all the *superannuation lump sums that could be payable from the interest at that time. SECTION 307-210 Tax free component of superannuation interest 307-210 The tax free component of a *superannuation interest is so much of the *value of the interest as consists of: (a) the *contributions segment of the interest; and (b) the *crystallised segment of the interest. Note: If superannuation benefits have been paid from the superannuation interest, the amount of the tax free component of the interest will be reduced by the tax free components of those superannuation benefits: see section 307-125. SECTION 307-215 Taxable component of superannuation interest 307-215 The taxable component of a *superannuation interest is the *value of the interest less the *tax free component of the interest. SECTION 307-220 What is the contributions segment? 307-220(1) The contributions segment of a *superannuation interest is so much of the *value of the interest as consists of contributions made after 30 June 2007, to the extent that they have not been and will not be included in the assessable income of the *superannuation provider in relation to the *superannuation plan in which the interest is held. 307-220(2) For the purposes of this section: (a) in determining whether contributions are included in the contributions segment under subsection (1):


(i) disregard the *taxable component of a *roll-over superannuation benefit paid into the interest; and (ii) for a *superannuation plan that is a *constitutionally protected fund — treat the superannuation plan as if it were not a constitutionally protected fund; and (b) disregard section 295-180 and Subdivision 295-D. 307-220(3) For the purposes of subparagraph (2)(a)(i), treat the *excess untaxed roll-over amount (if any) of the *roll-over superannuation benefit as part of the *tax free component of the benefit instead of the *taxable component of the benefit. SECTION 307-225 What is the crystallised segment? 307-225(1) To work out the crystallised segment of a *superannuation interest, first assume that: (a) an eligible termination payment had been made in respect of the holder of the interest just before 1 July 2007; and (b) the amount of the eligible termination payment had been equal to the *value of the interest at that time. 307-225(2) The crystallised segment of the *superannuation interest is so much of the *value of the interest as consists of the total of the following components of the eligible termination payment: (a) the concessional component; (b) the Post-June 1994 invalidity component; (c) the undeducted contributions; (d) the CGT exempt component; (e) the Pre-July 83 component. 307-225(3) For the purposes of paragraph (2)(e), disregard the *value of the interest just before 1 July 2007 to the extent that it would consist, apart from this subsection, of the *element untaxed in the fund of the *taxable component of a *superannuation benefit constituted by the eligible termination payment. 307-225(4) In this section, the following terms have the same meaning as in subsection 27A(1) of the Income Tax Assessment Act 1936 (as in force just before 1 July 2007): (a) concessional component; (b) Post-June 1994 invalidity component; (c) undeducted contributions; (d) CGT exempt component; (e) Pre-July 83 component; (f) eligible termination payment


Extracts from Regulations in relation to superannuation interests Income Tax Assessment Regulations 1997 Subdivision 307-D — Superannuation interests REGULATION 307-200.01 APPLICATION OF SUBDIVISION 307-D TO SUBDIVISION 292-D OF THE ACT 307-200.01 For the purposes of calculating an amount of contributions under Subdivision 292-D of the Act, this Subdivision does not apply. REGULATION 307-200.02 MEANING OF SUPERANNUATION INTERESTS 307-200.02 For subsection 307-200(2) of the Act, every amount, benefit or entitlement that a member holds in a self-managed superannuation fund is to be treated as 1 superannuation interest in the superannuation fund unless the amount, benefit or entitlement is to be treated as 2 or more superannuation interests in accordance with 1 of the other arrangements in this Subdivision. REGULATION 307-200.05 MEANING OF SUPERANNUATION INTERESTS — TREATING A SUPERANNUATION INTEREST AS 2 OR MORE SUPERANNUATION INTERESTS (SUPERANNUATION INCOME STREAMS) 307-200.05 If a superannuation income stream commences, an amount that supports the superannuation income stream is always to be treated as a separate superannuation interest. REGULATION 307-205.01 VALUE OF SUPERANNUATION INTEREST FOR CALCULATING PRE-JULY 1983 AMOUNT FOR MEMBERS IN THE CONTRIBUTIONS AND INVESTMENT PHASE 307-205.01(1) For paragraph 307-205(a) of the Act, this regulation specifies methods for determining the value of a superannuation interest at a particular time for the purposes of calculating the Pre-July 1983 amount of the crystallised segment of a tax-free component under section 307-225 of the Act. Note Calculating the Pre-July 1983 amount of the crystallised segment of the tax-free component will require the superannuation interest to be valued before 1 July 2007. This calculation will only be performed for a superannuation interest in the accumulation phase, and only for a superannuation interest in which part of the taxable component is comprised of an element taxed in the fund. Interest other than defined benefit interest 307-205.01(3) For a superannuation interest that is not a defined benefit interest, the method is as follows. Step 1

Assume that the member was eligible to retire immediately before 1 July 2007, and work out the total amount of all the superannuation lump sums that could be payable from the interest at that time.

Step 2

If the total amount worked out under step 1 is less than the total amount actually or notionally allocated to the member (other than because of superannuation contributions surcharge liabilities, insurance costs or other fees, taxes and charges), the value of the


interest is the amount actually or notionally allocated to the member. REGULATION 307-205.02 VALUE OF SUPERANNUATION INTEREST 307-205.02(1) For paragraph 307-205(a) of the Act, this regulation: (a) applies to a superannuation income stream or a superannuation annuity, other than: (i) a superannuation income stream of a type prescribed by regulation 295-385.01; or (ii) a superannuation income stream or a superannuation annuity for which the rules providing for the income stream or annuity are based on: (A) an identifiable lump sum amount; or (B) the amount available in the member's account; or (iii) a superannuation income stream that is supported by a superannuation interest that can be valued under paragraph 307-205.02B(a); and (b) specifies a method for determining the value of a superannuation interest at a particular time if the interest supports a superannuation income stream to which this regulation applies. Note The proportioning rule requires the tax-free and taxable components of superannuation to be paid out as benefits in the same proportion as they make up of the underlying interest. A value of a superannuation interest is required to ensure that the proportioning rule operates appropriately. 307-205.02(2) The value of the interest at a particular time is the sum of: (a) the product of: (i) the annual amount of the superannuation income stream payable in respect of the superannuation interest at that time; and (ii) the applicable factor set out in clause 1 of Schedule 1B; and (b) the product of: (i) the nominal value of the superannuation lump sum, if any, which is payable in respect of the interest at a time in the future, other than a future lump sum which is a commutation of the income stream included in subparagraph (a)(i); and (ii) the applicable factor set out in clause 2 of Schedule 1B REGULATION 307-205.02A SUPERANNUATION INCOME STREAMS OR SUPERANNUATION ANNUITIES BASED ON IDENTIFIABLE AMOUNTS — VALUE OF AN INTEREST 307-205.02A For a superannuation income stream or a superannuation annuity mentioned in subparagraph 307-205.02(1)(a)(ii), the value of the superannuation interest that supports the income stream or annuity is: (a) the identifiable lump sum amount; or (b) the amount available in the member's account

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