Edited version of private ruling

Authorisation Number: 1011602161065

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Subject: income protection with your superfund

Are you entitled to a deduction for the cost of salary continuance cover where it is paid through your superannuation fund?

No.

This ruling applies for the following period

Year ended 30 June 2004

Year ended 30 June 2005

Year ended 30 June 2006

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2003

Relevant facts

You have salary continuance cover through your Superannuation Fund.

The contributions into the superfund are made by your employer.

Through the fund you have salary continuance insurance cover. The insurance premiums are deducted from your account balance.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Summary

The contributions for your salary continuance cover are not directly incurred by you. Therefore a deduction is not allowable.

Detailed reasoning

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379; Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 557).

A deduction will be available for the cost of insurance premiums if the taxpayer buys insurance against the loss of an income stream for which periodical payments received under the policy would constitute assessable income to the taxpayer, or buys insurance to cover against losses arising as a result of the taxpayers income producing activities (Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; (1981) 81 ATC 4114; (1981) 11 ATR 538).

Members and employers make contributions to superannuation funds to provide retirement benefits for members. Some funds may provide ancillary benefits, such as salary continuance cover, to members as part of their association with the fund. The fund may insure against any contingent liability it has to pay income protection benefits or the fund may be self insured. Provision of ancillary benefits does not change the fact that the contribution made by the members and employers are for retirement benefits and not for insurance cover.

Superannuation funds, as part of their operations, allocate income and expenses to their members. The income earned by the superannuation fund does not form part of the assessable income of the members. Similarly, any expenses allocated to the members are not deductible to the members. They are expenses incurred by the fund.

Where the superannuation fund provides an insurance benefit, it is considered that the fund owns the policy. Therefore, the superannuation fund is the actual taxpayer entitled to a deduction. This is because the expense is incurred by the superannuation fund, not its members. The deduction is claimed against income that is earned by the fund.

In your case, the salary continuance insurance premiums are deducted from your account balance with your superannuation fund. However, as the superannuation fund is the owner of the insurance policy and has actually incurred the expense for the premiums, you are not entitled to a deduction for the premiums paid.

The fact that there is an insurance policy tied in with your superannuation cover which might pay you part of your salary in the event of periods of disability, does not make it possible to separate out that part of the super cover to allow a deduction.

In any case, it cannot be argued that you have incurred expenses for the salary continuance insurance as the policy is not a separate one paid for by yourself. Any amount that is paid out of the super fund accounts for your insurance cover, is not an expense incurred by you, but is an expense of the super fund.

It is acknowledged that the contributions are deducted from your account. However, the contributions to the super fund have been made by your employer and, as highlighted above, you have not incurred any separate expense for the insurance policy. Therefore, no deduction is available to you.

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