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: damoss@deloitte.com.au



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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






















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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 members 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

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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 individuals 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 individuals
marginal tax rate and Reasonable Benefit Limit position.


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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 members 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 members 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.

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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.



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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.


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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


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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.


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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


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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 members 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 paymentthe 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.

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(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 members 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 members 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 pensions 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
members other superannuation benefits in the fund including a taxable component. Their

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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 years 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 funds investment
strategy. In addition the application of reserves to a members 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.

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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

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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 Davids 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 damoss@deloitte.com.au.


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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




David Moss Direct Line: 02 9322 5479 Email: damoss@deloitte.com.au 17
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):

David Moss Direct Line: 02 9322 5479 Email: damoss@deloitte.com.au 18
(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



David Moss Direct Line: 02 9322 5479 Email: damoss@deloitte.com.au 19
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

David Moss Direct Line: 02 9322 5479 Email: damoss@deloitte.com.au 20
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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