Departmental Committee on the effect of the Rule of Law against Perpetuities in its application to certain Superannuation Funds and Funds with analogous purposes. Presented to Parliament by the Financial Secretary LONDON: PRINTED AND PUBLISHED BY HIS MAJESTY'S STATIONERY OFFICE. To be purchased directly from H.M.STATIONERY OFFICE at the following addresses: Adastral House, Kingsway, London, W.C.2; 120, George Street, Edinburgh; York Street, Manchester; 1, St. Andrew's Crescent, Cardiff; 15, Donegall Square West, Belfast; or through any Bookseller. 1927. Price 4d. net. Cmd. 2918. TERMS OF REFERENCE AND CONSTITUTION OF THE COMMITTEE. TREASURY MINUTE DATED THE 5TH FEBRUARY, 1927. The Financial Secretary proposes to the Board that a Committee be appointed to examine the effect of the Rule of Law against Perpetuities in its application to certain superannuation funds and funds with analogous purposes, and, if it is found that the Rule places such funds under disabilities, to make recommendations as to the procedure by which, and the conditions under which, regard being had to existing enactments, such disabilities may be removed. The Committee will be constituted as follows: Sir Claud Schuster, G.C.B., C.V.O., K.C., Chairman. Sir Percy Thompson, K.B.E., C.B. Sir Alfred Watson, K.C.B. F. Phillips, Esq. with W. Philipson, Esq., of the Inland Revenue Department as Secretary. My Lords concur. The cost of printing and publishing, the only expense of the Committee, is estimated by the Stationery Office at £12 78. 6d. REPORT TO THE LORDS COMMISSIONERS OF HIS MAJESTY'S TREASURY. MAY IT PLEASE YOUR LORDSHIPS: We were appointed to examine the effect of the Rule of Law against Perpetuities in its application to certain superannuation funds and funds with analogous purposes, and, if it were found that the Rule places such funds under disabilities, to make recommendations. A copy of the Treasury Minute in the matter is prefaced to this Report. 2. We have held 15 meetings and have taken evidence from 10 witnesses. These witnesses were representatives of the Association of Superannuation and Pension Funds, the Institute of Actuaries, important business concerns interested in superannuation and other funds for the benefit of employees, and official witnesses from the Inland Revenue Department and the Registry of Friendly Societies. 3. Since our concern with the difficult subject of the Rule of Law against Perpetuities extended only to its application to certain funds, we have examined the subject so far only as appeared necessary to form an opinion whether any considerable number of funds are affected by the Rule, and, if so, whether its application to such funds is attended by disabilities. 4. The results of our examinations are presented under the following main heads: I. History of the present problem ... III. Disabilities of superannuation funds V. Funds with analogous purposes Paragraphs. 5 to 10 11 12 to 21 ... 22 to 32 33 to 35 1.-HISTORY OF THE PRESENT PROBLEM. 5. Before discussing the type of fund which we understand to be implied by the words "certain superannuation funds," it will be convenient to state the circumstances in which the attention of persons interested in such funds has been drawn to the possible bearing of the Rule upon trusts under which the funds are constituted. The Rule may affect adversely any fund of the type under consideration if the trusts under which the fund is constituted are such as to infringe its provisions, but the question now under consideration arose in connection with claims to exemption from Income Tax under Section 32 of the Finance 63632 A 2 Act, 1921, made on behalf of funds falling within the purview of that Section-a class which is narrower than the classes of funds that fall within the consideration of the Committee. 6. The Royal Commission on the Income Tax, which reported in 1920, gave some consideration to the question of Income Tax relief in regard to funds constituted, in connection with business undertakings, for the purpose of making some provision for employees in those undertakings on their attaining an age at which they might normally be expected to relinquish their employment, or in the event of their becoming incapacitated for further employment at some earlier age. The recommendations of the Commissioners on the subject are contained in Section XVI," Superannuation Funds, Provident and Thrift Funds, etc.," starting at page 69 of their Report. (Cmd. 615). Those recommendations dealt mainly with the two types of fund indicated by the head note to the Section, and the relative paragraphs may conveniently be quoted : "317. The schemes under which Superannuation Funds have been formed vary considerably, but the general plan adopted is, roughly speaking, as follows: (a) deductions are made from the salaries or wages of the employees and paid over by the employer to the fund: (b) the employer contributes a further sum to the fund; (c) these contributions from the employer and employees are invested, and the capital of the fund consists of the accumulated contributions with interest additions; (d) on retirement, at a specified age or on previous incapacity, the employee receives from the fund a pension based on the salary or wages received by him during his period of service with the employer; (e) in the event of the employee leaving the service of the employer he receives back his contributions with or without interest, according to the constitution of the particular fund; (f) in the event of an employee dying before he becomes entitled to superannuation, his legal representatives receive a sum equal to twice the amount of his contributions with or without interest, according to the constitution of the particular fund. It will be seen that the ordinary Superannuation Fund is built up of (a) contributions by the employer, (b) contributions by the employee and (c) interest or dividends on the invested funds. "318. The request made to us on behalf of the funds (a) that the employer's contributions should be legally recognised as a deduction in calculating his liability to Income Tax; (b) that the contributions of the employee should be allowed as a deduction from his income for the purposes of assessment; (c) that the income of funds from investments should be exempt from Income Tax, and that only pensions paid should be liable to assessment. "319. We consider that when an employer makes an irrecoverable contribution to a recognised fund for the benefit of his workpeople his contribution should be regarded as a business expense, and allowed as a deduction in computing his profits. We think also that the contributions of an employee which are made to secure a future pension should be allowed as a deduction from the income upon which his Income Tax would otherwise be charged. In the event of his contributions being returned to an employee he should pay Income Tax thereon, we suggest, at a compounded rate or at an average of the rates at which he was liable while his contributions were being made. The income arising from the investments of the fund should also, we think, be exempted from tax, but if interest is paid to an employee in addition to his returned contributions on the happening of a contingency other than death, that interest should then be liable. to Income Tax in the same way as his returned contributions. Although there may be no logical ground for excluding from assessment any interest that forms part of the sum paid in the event of death, yet the constitution of most Superannuation Funds is of such a nature that in practice it would be impossible to distinguish interest which forms part of the payment on death from the other interest of the fund. For this reason, and because the sum involved is immaterial, we think that any interest included in the sum payable in the event of death should not be brought into assessment. 320. With the above recommendations we couple the condition that all pensions should be regarded as income and assessed in the hands of the recipients, and that the managers of the various funds, as a condition of exemption, should give all necessary information for the due assessment of such pensions. "321. A Provident and Thrift Fund works generally on the following principles : (a) deductions are made from the salaries or wages. of the employees and paid over by the employer to the fund; |