Edited version of private ruling

Authorisation Number: 1011841386166

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Ruling

Subject: Taxation treatment of premiums paid by trustee of a complying super fund

The taxation treatment of premiums paid by One Ltd as trustee of a complying superannuation fund in respect of an insurance policy as described.

Issue 1

Are Policy 1 and Policy 2 to be considered jointly for the purposes of determining a deduction under section 295-465 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

There is no separate definition of an insurance policy for the purposes of Subdivision 295-G of the ITAA 1997. However, a complying fund can deduct premiums it pays for insurance policies to the extent they are for current or contingent liabilities to provide benefits referred to in section 295-460 of the ITAA 1997.

Issue 2

Is Policy 1 entered into by the Fund wholly or partly for current or contingent liabilities of the Fund to provide disability superannuation benefits for the purposes of section 295-460 of the ITAA 1997?

Answer

Yes.

Issue 3

Is Policy 1 entered into by the Fund wholly or partly for a current or contingent liability of the Fund to provide superannuation death benefits for the purposes of section 295-460 of the ITAA 1997?

Answer

Yes.

Issue 4

Is Policy 1's premium deductible to the Fund under subsection 295-465(1) of the ITAA 1997, and if so, to what extent?

Answer

Yes. However, the rate of deductions allowable will decrease to that part of the premium paid relating to those 'permanent disability' benefits which remain current or contingent liabilities of the Fund by meeting the definition supplied by section 995-1 of the ITAA 1997.

This ruling applies for the following period

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

1 July 2012 to 30 June 2013

1 July 2013 to 30 June 2014

The scheme commenced

9 June 2010

Relevant facts

An insurance policy is held by the trustee of a superannuation fund. This policy issued to One Limited will provide cover for death and terminal illness and permanent disability. Claims for permanent disability must also meet the Superannuation Industry (Supervision) Act 1993 (the SIS Act) definition of permanent incapacity.

A payment of a benefit under Policy 1 in respect of a permanent disability will be administered such that it would also meet the definition of a disability superannuation benefit stated in subsection 995-1(1) of the ITAA 1997. For those illnesses or injuries not covered by Policy 1, a separate policy is held outside of the superannuation fund, which is referred to as Policy 2.

Claims for death and terminal illness are paid under the superannuation policy to One Limited as trustee of the Fund. Claims in respect of permanent disability are first assessed under Policy 1 to determine if the following requirements are satisfied:

· The definition of a illness or injury covered under Policy 1; and

· The SIS Act definition of permanent incapacity.

If both requirements above are satisfied then a benefit will be payable to One Limited. The release of the benefit from the Fund to an affected member will be subject to the governing rules of the Fund. If only the first requirement is satisfied the benefit will be payable to the owner of Policy 2.

Under Policy 1 benefits are payable to the trustee in the event the insured dies, becomes terminally ill or meets the relevant definition of permanent incapacity. The trustee then deals with the benefits in accordance with the terms of the superannuation trust deed.

Under Policy 2 benefits are payable to the insured in the event the insured meets the relevant definition of illness or injury.

Policy 1 is held by One Limited as trustee of the Fund. One Limited meets the premiums payable in respect of policies held within the Fund. The cost of the cover is met by either contributions paid by the member to the trustee of the Fund and in turn applied by the trustee towards the cover, or, from the members' account balance.

One Limited proposes to meet the premium payments in respect of Policy 1, and would debit a member's account to reflect the cost of such premium.

Policy 1 and Policy 2 together result in the provision of a comprehensive and linked level of cover for the policy owner/superannuant.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 295-G

Income Tax Assessment Act 1997 Section 295-460

Income Tax Assessment Act 1997 Section 295-460 (1)(a)

Income Tax Assessment Act 1997 Section 295-460 (b)

Income Tax Assessment Act 1997 Section 295-465

Income Tax Assessment Act 1997 Section 295-465 (1)

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 995-1 of the ITAA 1997

Income Tax (Transitional Provisions) Act 1997 Section 295-466

Income Tax (Transitional Provisions) Regulations 2010 Regulation 4

Reasons for decision

Issue 1

Summary

As the Income Tax Assessment Act 1997 (ITAA 1997) does not provide a definition of an insurance policy for the purposes of Subdivision 295-G of the ITAA 1997 it therefore cannot be determined if Policy 1 and Policy 2 are to be considered jointly for the purposes of determining a deduction under section 295-465 of the ITAA 1997. However, subsection 295-465 (1) of the ITAA 1997 sets out the requirements for determining a deduction for premiums paid for insurance policies. Subsection 295-465(1) states that:

A complying superannuation fund can deduct the proportions specified in this table of premiums it pays for insurance policies that are (wholly or partly) for current or contingent liabilities of the fund to provide benefits referred to in section 295-460 for its members. It can deduct the amounts for the income year in which the premiums are paid.

Item 5 of the table states that a fund can deduct that part of a premium that is specified in the policy as being wholly for the liability to provide benefits referred to in section 295-460 of the ITAA 1997.

Conclusion

There is no separate definition of an insurance policy for the purposes of Subdivision 295-G of the ITAA 1997. However, a complying fund can deduct premiums it pays for insurance policies to the extent they are for current or contingent liabilities to provide benefits referred to in section 295-460 of the ITAA 1997.

Issue 2

Summary

A disability superannuation benefit as referred to in paragraph 295-460(b) of the ITAA 1997 is defined from the 1 July 2011 by section 995-1 as meaning a disability superannuation benefit if:

· the benefit is paid to a person because he or she suffers from ill-health (whether physical or mental); and

· 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training.

The payment of a 'permanent incapacity' benefit under Policy 1 will be administered such that it would meet the definition of a disability superannuation benefit as stated in subsection 995-1(1) of the ITAA 1997.

Conclusion

It is therefore considered that Policy 1 is entered into by the Fund wholly or partly for current or contingent liabilities of the fund to provide a disability superannuation benefit as defined in paragraph 295-460(b) of the ITAA 1997.

Issue 3

Summary

A superannuation death benefit as referred to in paragraph 295-460(a) of the ITAA 1997 is defined in section 995-1 as having the meaning given by section 307-5 of the ITAA 1997.

Section 307-5 of the ITAA 1997 defines a superannuation death benefit as:

A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

The Policy 1 issued to One Ltd as trustee will provide cover for death of the member insured. Claims for death of the insured are paid under the superannuation policy to One Limited as trustee of the Fund. The trustee then deals with the benefits in accordance with the terms of the superannuation trust deed.

Conclusion

It is therefore considered that Policy 1 is entered into by the Fund is wholly or partly for current or contingent liabilities of the fund to provide a superannuation death benefit as defined in paragraph 295-460(a).

Issue 4

Summary

Subsection 295-465(1) of the ITAA 1997 provides:

A complying superannuation fund can deduct the proportions specified in this table of premiums it pays for insurance policies that are (wholly or partly) for current or contingent liabilities of the fund to provide benefits referred to in section 295-460 of the ITAA 1997 for its members. It can deduct the amounts for the income year in which the premiums are paid.

Item 5 of the table states that a fund can deduct that part of a premium that is specified in the policy as being wholly for the liability to provide benefits referred to in section 295-460 of the ITAA 1997.

A deduction is available to the Fund as it meets the requirements of subsection 295-465(1) of the ITAA 1997. That is, as determined in questions 2 and 3, the Fund has a current or contingent liability to provide disability superannuation benefits and superannuation death benefits.

However, until 30 June 2011 'permanent disability' has an extended meaning which is provided by section 295-466 of the ITAA 1997 and Regulation 4 of the Income Tax (Transitional Provisions) Regulations 2010. This extended meaning allows a deduction for a broader range of physical disablement than those normally provided by subsection 295-465(1) of the ITAA 1997.

Conclusion

Until 30 June 2011 the Policy 1 premium is deductible to the Fund under subsection 295-465(1) of the ITAA 1997. However, from 1 July 2011 the extended meaning of 'disability superannuation benefit' in section 295-466 of the ITAA 1997 ceases to apply, by the operation of the Income Tax (Transitional Provisions) Act 1997. The rate of deductions allowable will then decrease to that part of the premium paid relating to those 'permanent disability' benefits which remain current or contingent liabilities of the Fund by meeting the definition supplied by section 995-1 of the ITAA 1997.

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