Speaking in a webinar, DBA Lawyers director Bryce Figot explained that one of the questions the ATO uses to identify whether an arrangement is subject to Part IVA of the ITAA 1936, is whether the objective dominant purpose of entering a scheme was to obtain a tax benefit.
Therefore, if a TRIS was commenced during the pre-commencement period, on 1 December 2016 for example, and commuted on 30 June 2016, Part IVA could potentially be enlivened.
“The ATO itself says merely starting a pension during the pre-commencement period would not be of concern. However, a commutation of the pension shortly after its commencement, that might be [a concern], because objectively, why do you start a TRIS if only to stop it?” Mr Figot said.
“If those are the only facts, I can’t see any other objective reason to start that TRIS other than to stop it to get the tax benefit of increasing the cost base. Increasing the cost base is not a tax benefit per se, but it could lead to a tax benefit.”
Mr Figot said there could be additional facts that lead to an objective conclusion that Part IVA does not apply in this situation.
“Maybe there were extra reasons why the person really needed the money, maybe their house burnt down or a renovation became more expensive or someone got sick. If you can actually say, ‘Well, we really needed the money so we started the TRIS but then we didn’t need the TRIS anymore because we paid for it so we stopped it’.”
Another scenario that could lead to Part IVA concerns is where a super fund has deemed segregation and the account-based pension is fully commutated on 30 June 2017, and a new account-based pension is commenced on 1 July 2017.
“[For example, a] super fund is using all of its money to pay a pension so it’s got deemed segregation, and it’s only a million dollars, the account-based pension is fully commutated on 30 June 2017 and then a new account-based pension is commenced on 1 July 2017. Because all of the assets stopped being segregated, the fund is eligible to choose the relief, and it chooses the relief,” Mr Figot said.
“Is that Part IVA? Well, objectively, why did it commute the pension on 30 June just to start a new pension on 1 July?” he added.
“There’s no obvious reason other than getting the cost base reset which will probably lead to a tax benefit, so that one probably is Part IVA.”