The Australian Tax Office (ATO) has announced that they have made a decision to allow eligible persons to make an application for a transitional reasonable benefits limit (TRBL).
This follows from a case decision that was handed down in the Adminstrative Appeals Tribunal (AAT) on the 16th March 2001 in favour of the taxpayer. As such taxpayers are able to lodge new transitional RBL applications as well as refresh prior determinations.
A new window of opportunity now arises for many people who either, failed to make an application on time or better yet, were not even aware that they were able to obtain a higher TRBL.
Prior to the introduction of the flat dollar RBLs in 1994, reasonable benefit limits were determined under the former OSSA rules and based on an individual’s highest average salary (HAS). Therefore every individual, based on their HAS, had an individual limit. The HAS was calculated to be the average salary over any three consecutive financial years. Through complex calculations the HAS was then translated into a person’s lump sum and pension RBL.
In an effort to limit the amount of concessionally taxed superannuation benefits a person could receive the Government, from 1 July 1994, replaced salary linked RBLs with flat dollar reasonable benefit limits. These commenced at $400,000 for lump sum benefits and $800,000 for complying pension benefits and to be indexed annually. Furthermore the ATO replaced the former ISC in administering these rules.
At the same time the grandfathering provisions were introduced to prevent uproar for those who, at the time, were approaching retirement and were well on their way to building their superannuation nest egg using the salary-based RBLs.
As a concession, the TRBL rules were introduced allowing people, who could satisfy specified criteria, to lodge an application for a higher RBL. This application was to be lodged by 31 December 1996, later extended to 4 April 1997 or within such further extension of time as the Commissioner allowed.
Depending upon a person’s age a transitional RBL is determined in accordance with the TRBL rules which are briefly summarised below and can be found in Part 5A of the Income Tax Regulations 1936.
For a person aged 50 or more at 1 July 1994:
The TRBL rules automatically allow a person to have their RBL calculated under the salary based system and to be entitled to a higher HAS-based RBL, known as the transitional RBL. (Regulation 53A)
A person will have a TRBL if their HAS-based RBL exceeds $400,000 (lump sum RBL) or $800,000 (pension RBL). If the TRBL is calculated to be less than the flat dollar limits then the new rules would apply. The value of the TRBL for a person aged 50 or more is equal to the HAS-based RBL.
The value of the TRBL for a person aged 50 or more is equal to the HAS-based RBL. There is no requirement for a person to have any superannuation at 1 July 1994 to qualify for a TRBL. For example John Harrison, a sales director for a successful timber operation, was 52 on 1 July 1994 and had accumulated approximately $350,000 in superannuation benefits to date. He calculated that he had a HAS-based lump sum RBL of $480,000 and HAS-based pension RBL of $960,000 at that time. The value of his TRBL at that time is then equal to the HAS-based limits as these exceed the flat dollar limits.
For a person aged less than 45 at 1 July 1994:
In order for a person to qualify for a transitional RBL they need to demonstrate their commitment to the accumulation of super back at that time (Regulation 52).
Typically this is demonstrated through the amount of vested superannuation benefits held at 30 June 1994 which is defined in Regulation 47(5) to include benefit entitlements pursuant to an employment contract and super or rollovers sitting in a super fund, ADF or life company.
Also added to the total are benefits paid between 1990 and 1994. All benefit entitlements are calculated in accordance with the rules contained within Regulation 47(5).
The value of a TRBL for a person aged less than 45 at 1 July 1994 is equal to the lesser of the vested superannuation benefits at 30 June 1994 and their HAS-based RBL. As a consequence a person may not be eligible for a TRBL even though their HAS-based RBL exceeds the flat dollar limits.
For example Bill Stevens, a successful merchant banker, was aged 42 on 1 July 1994 and had calculated a HAS-based RBL of $600,000 (lump sum) and $1,200,000 (pension). However he had only accrued $350,000 in vested superannuation benefits at 30 June 1994. On this basis Bill does not qualify for a TRBL.
Conversely, one of Bill’s colleagues working for another bank, Jeff Simpson with similar HAS-based RBLs, had vested superannuation benefits at 30 June 1994 comprising an entitlement to an amount of $320,000 payable upon termination of employment in respect of a restraint of trade agreement; $100,000 in personal super sitting in a life company; and $805,000 housed in his own family fund. As a consequence Jeff should qualify for a TRBL and it will be equal to the value of his vested superannuation benefits as this figure is less than the HAS-based RBL.
For a person aged between 45 and 49 at 1 July 1994:
Similarly, a person falling within this category will also need to show that they have accrued substantial superannuation benefits at 30 June 1994 in order to qualify for a TRBL. (Regulation 53) However, a concessional formula is applied to the balance of their vested superannuation benefits to compensate for the fact that they are closer to retirement than their younger counterparts. This is calculated on a proportional basis having regard to the person’s age as at 30 June 1994.
For example Brian Jackson was aged 47 at 1 July 1994. His birth date was 1 May 1947. His HAS-based lump sum RBL has been calculated to be $460,000 and HAS-based pension RBL has been calculated to be $920,000. He has an entitlement to an early retirement lump sum package of $250,000 and has $500,000 in benefits in his own family fund. Brian’s pension TRBL would be calculated out to be $823,642.
In circumstances where a person is an associate of the employer and being paid a salary greater or less than an arm’s length amount the Commissioner will determine that the arm’s length salary is to apply for the purposes of the HAS. (Regulation 47(3)(c) & 47(4)).
For example Harry Johnson has operated as the managing director of his own business for 20 years through a company of which he is a shareholder and director. He has generally only drawn sufficient income upon which to live comfortably apart from the good years where he has perhaps taken his family on holidays or paid a deposit on a holiday house.
Similarly, in bad years Harry has drawn far less than normal in an attempt to conserve cash flow. The amount Harry has drawn as salary generally would be considered less than the amount he would have paid had he employed a person externally to perform that function.
In this instance the Commissioner would more than likely determine an arm’s length salary that would be considerably higher than that which Harry paid himself. It would be this higher figure which would be used as the basis for a HAS calculation.
The transitional RBL case (Case (2001) AATA 220 – 16/3/01) involved circumstances where a taxpayer applied for an extension of time in October 1997 to lodge a TRBL application.
This request had been denied on the basis that the taxpayer should have taken reasonable steps to ensure that the application was lodged within the relevant timeframe. The guidelines set out in TD 97/7 were utilised to make this decision.
The taxpayer ended up in the AAT looking at whether or not the AAT should grant the extension of time in which to lodge the TRBL. Whilst being aware of the TRBL rules the taxpayer basically forgot until September 1997 at which time he expedited the matter and lodged the application within one month. The Tribunal accepted that the taxpayer forgot to register the application by reason of the surrounding circumstances during that time.
Despite the guidelines set out in TD 97/7 the Tribunal considered it appropriate to look at the cause of the forgetfulness and that on the basis of those circumstances described above it was reasonable that he forgot to make the application by the due date. The Tribunal considered that these factors weighed significantly in favour of the taxpayer and the Commissioner should have allowed the taxpayer to lodge a late application for a TRBL.
As mentioned previously, this creates an opportunity for financial planners to lodge an application for a TRBL for clients that may satisfy the relevant rules.
This opportunity may be particularly useful with clients who, in running their own business for many years, did not draw an arm’s length salary. As alluded to earlier this would, prima facie, serve as a detriment in determining that person’s RBL based on their HAS but for the deeming rules described above allowing the Commissioner to determine an arm’s length salary.
In discussions with the Tax Office on this recent announcement we have found that the onus will be placed on the taxpayer to provide all the necessary evidence and documentation. This would include, for example:
??Group certificates for years prior to the introduction of the flat dollar RBLs, which are required to establish the HAS;
??Supporting documentation for arm’s length salary where this is an issue;
??Commencement date of eligible service period for calculating the reasonable benefit multiple;
??Evidence of value of vested superannuation benefits as at 1 July 1994, for those people under age 50 at 1 July 1994.
Grant Abbott is a director of the Strategist Group
