• 11. Deductions

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    K Exempt current pension income

    The gross income of a complying superannuation fund or PST derived from assets held to provide for current 'pension liabilities' is exempt from income tax. You would have shown this gross income amount as part of the total shown in the relevant labels at item 10. To ensure that that income derived from assets held for current pension liabilities is not taxed, it is necessary to deduct an identical amount at K.

    Do not reduce the exempt income shown at K by the amount of expenses incurred in deriving that income. Doing so will understate the deductible amount of exempt current pension and will result in some of that income being subject to tax.

    Expenses incurred in gaining or producing exempt income are not deductible; those expenses should not be shown anywhere at item 11.

    For treatment of expenses incurred wholly or partly in producing assessable income, see deductions:

    • D Capital works deductions
    • E Deduction for decline in value of depreciating assets
    • I Investment expenses
    • J Management and administration expenses, and
    • L Other deductions.

    Pension liabilities are the fund's liabilities to pay superannuation income stream benefits. The exemption on current pension income applies to all funds currently paying pensions. It does not provide an automatic exemption of the fund's total income as certain conditions must be met to obtain an exemption. There are two methods by which the trustee of a fund can determine the exempt income shown at K. Either one method or both methods may be used depending on the circumstances. Different conditions for claiming the exemption apply, depending on the method used.

    A fund is entitled to franking credits on franked dividends received, even when the dividends relate to current pension liabilities.

    First method: Income from segregated assets used to meet current pension liabilities

    If a complying fund segregates its assets so that the income can be identified as derived from the segregated assets held to provide for current pension liabilities, that income is the exempt income (section 295-385 of the ITAA 1997). For the purpose of calculating exempt income under section 295-385 of the ITAA 1997, non-arm's length income and assessable contributions are excluded from the fund's income.

    The trustee must obtain an actuarial certificate before the date for lodgment of the fund's tax return for segregated current pension assets.

    An actuarial certificate is not required if assets are segregated at all times during the income year and the only superannuation income stream benefits being paid from the segregated assets are a type prescribed by Income Tax Assessment Regulations 1997. Superannuation income streams prescribed for this purpose by Income Tax Assessment Regulation 295-385.01 include allocated pensions, market-linked pensions and account-based pension types.

    If the fund also pays any other type of superannuation income stream, an actuarial certificate will be required for all superannuation income streams (subsection 295-385(5) of the ITAA 1997).

    Assets of a complying superannuation fund that are supporting a superannuation income stream benefit prescribed by the regulations (for the purposes outlined above), are not segregated current pension assets to the extent that the market value of those assets exceeds the account balance of the benefit (subsection 295-385(6) of the ITAA 1997).

    Second method: Income from unsegregated assets used to meet current pension liabilities

    If a complying fund's income is derived from assets that are not segregated between current pension liabilities and other liabilities under subsection 295-390(3) of the ITAA 1997, the income that is exempt from tax is the portion calculated by dividing:

    • the fund's average value of current pension liabilities (excluding liabilities for which segregated current pension assets are held)
      by
    • the fund's average value of superannuation liabilities (excluding liabilities for which segregated current pension assets or segregated non-current assets are held).

    For the purposes of calculating exempt income under this method, non-arm's length income, assessable contributions, income derived from segregated non-current assets and income exempted under section 295-385 of the ITAA 1997 are excluded from fund income (subsection 295-390(2) of the ITAA 1997).

    An actuarial certificate is required under section 295-390 of the ITAA 1997.

    An actuarial certificate is also required if the fund has segregated non-current assets (section 295-395 of the ITAA 1997).

    Pooled superannuation trusts

    Pooled superannuation trusts (PSTs) are entitled to an exemption for that portion of the income that is attributable to the current pension liabilities of unit holders that are complying funds and that could otherwise be claimed as exempt income by the complying fund if the income was derived directly by the complying fund. Non-arm's length income, and income where the unit holder has transferred a tax liability under section 295-260 of the ITAA 1997, must be excluded.

    Subsection 295-400(1) of the ITAA 1997 sets out a formula for calculating this portion of income where the unit holder segregates current pension assets. Alternatively, the trustee of a PST can choose a different amount as exempt income of the PST by applying subsection 295-400(3) of the ITAA 1997.

    Example 4a

    The ABC Super Fund earned $100,000 in interest and paid $1,000 in bank fees. 100% of the fund's assets were held to provide for current pension liabilities.

    The fund shows:

    • the $100,000 interest as income at C Gross interest item 10
    • a deduction of $100,000 for exempt current pension income at K Exempt current pension income.

    The fund cannot claim the $1,000 in bank fees as a deduction because they were incurred in earning the exempt current pension income.

    Example 4b

    The DEF Super Fund earned $60,000 in interest and paid $500 in bank fees. Applying the second method for calculating exempt current pension income, the fund determines that 80% of its income was exempt current pension income.

    The fund shows:

    • $60,000 in interest as income at C Gross interest item 10
    • a deduction of $48,000 (that is, 80% of $60,000) for exempt current pension income at K Exempt current pension income
    • a deduction of $100 (that is, 20% of $500) for bank fees at A Interest expenses within Australia.

    The fund cannot claim the remaining bank fees of $400 (that is, 80% of $500) as a deduction because they were incurred in earning the exempt current pension income.

    Example 4c

    The GHY Super Fund earned $30,000 in interest and paid $200 in bank fees. Applying the second method for calculating exempt current pension income, the fund determines that 30% of its income was exempt current pension income. It has $10,000 in tax losses carried forward from the previous year.

    The fund shows:

    • the $30,000 interest as income at C Gross interest item 10
    • a deduction for $9,000 (that is, 30% of $30,000) of exempt current pension income at K Exempt current pension income
    • a deduction for bank fees of $140 (that is, 70% of $200) at A Interest expenses within Australia.

    The fund cannot claim the remaining bank fees of $60 (that is, 30% of $200) as a deduction because they were incurred in earning the exempt current pension income.

    The $10,000 in tax losses carried forward must be reduced by net exempt income of $8,940 (that is, $9,000 of exempt income less bank fees of $60 incurred in earning exempt income). The remaining amount of $1,060 tax losses will be applied against the other income of the fund.

    The fund shows:

    • a deduction for tax losses of $1,060 (that is, $10,000 less $8,940) at M Tax losses deducted
    • tax losses carried forward to later years at U Tax losses carried forward to later income years item 13 as zero.

    The losses used in this example refer to tax losses rather than capital losses. For further information, see Section E: Losses.

    Last modified: 11 Jan 2012QC 28016