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Ruling

Subject: Deduction for further liability death benefits

Questions

Is the Fund entitled to a deduction under section 295-470 of the Income Tax Assessment Act 1997?

Advice/Answers

No.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

The Fund is a self managed superannuation fund.

A member of the Fund (the Member) passed away in the 2009-10 income year.

No insurance premiums were paid by the Fund in the 2009-10 and previous income years.

No deductions have been claimed by the Fund in any income year for insurance premiums.

No amount of the benefit paid in respect of the Member is in excess of the Member's account balance in the Fund.

The Fund does not self insure.

There is no actuary certificate specifying any amount the Fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide disability benefits.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-460.

Income Tax Assessment Act 1997 Section 295-465.

Income Tax Assessment Act 1997 Subsection 295-465(1).

Income Tax Assessment Act 1997 Subsection 295-465(2).

Income Tax Assessment Act 1997 Subsection 295-465(2A).

Income Tax Assessment Act 1997 Subsection 295-465(4).

Income Tax Assessment Act 1997 Section 295-470.

Reasons for decision

Summary

The trustee of the Fund is not entitled to claim a deduction for its future liability to pay benefits. A prerequisite for claiming such a deduction is that the trustee has made a choice not to claim a deduction for:

· premiums paid by the Fund in relation to an insurance policy, or

· if the Fund is self insuring, the amount that an actuary certifies the Fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy.

As the Fund did not pay premiums for an insurance policy or self insure, it does not have an entitlement to claim a deduction for insurance which would provide benefits in relation to death, a terminal medical condition or disability.

Accordingly, it follows that as no choice exists the Fund is not entitled to claim a deduction in relation to its future liability to pay benefits.

Detailed reasoning

A complying superannuation fund (a fund) that provides benefits in relation to death, a terminal medical condition or disability, as detailed in section 295-460 of Income Tax Assessment Act 1997 (ITAA 1997), may claim a deduction under section 295-465 of the ITAA 1997 for a portion of the premiums that are paid for an insurance policy which covers these benefits.

Alternatively, if the trustee of a fund is entitled to a deduction under section 295-465 of the ITAA 1997, and makes a choice under subsection 295-465(4) of the ITAA 1997 not to claim the deduction, the trustee can claim a deduction under section 295-470 of the ITAA 1997 for future liability to the pay benefits in relation to death, a terminal medical condition or disability (the benefits).

Thus, in order to determine whether a fund can claim a deduction under section 295-470 of the ITAA 1997 consideration must first be given as to whether the fund is entitled to a deduction under section 295-465 of the ITAA 1997.

Deductions for insurance premiums

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

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 years in which the premiums are paid. (emphasis added)

In relation to the table in subsection 295-465(1) of the ITAA 1997, various types of insurance policies are listed, and the proportions of those policies, on which premiums are paid may be claimed as a deduction.

The effect of subsection 295-465(1) of the ITAA 1997 is that a superannuation fund which pays the premium for current or contingent liabilities of the fund (that is, liabilities relating to death, a terminal medical condition or disability) is entitled to claim a deduction.

In your case the Fund did not pay any premiums in relation to an insurance policy which covers the types of benefits stated in section 295-460 of the ITAA 1997 as the Fund did not have an insurance policy for those types of benefits.

In view of the above it is evident that no premiums were paid by the Fund and accordingly it cannot claim a deduction under subsection 295-465(1) of the ITAA 1997.

Notwithstanding the above, deductions may be allowed where a complying superannuation fund is self-insured.

Deductions for self-insurance

Subsection 295-465(2) of the ITAA 1997 states:

A complying superannuation fund can also deduct the amount it could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide benefits referred to in section 295-460 for which it does not have insurance coverage. It can deduct the amount for the income year when it has the liability.

Further, subsection 295-465(2A) of the ITAA 1997 states:

For the purposes of subsection (2), the regulations may provide that a specified proportion of an amount mentioned in subsection (2B) may be treated as being the amount the fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for its current or contingent liabilities to provide benefits referred to in section 295-460.

Example:

If:

1. an actuary certifies the amount a fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy; and

2. the insurance policy covers liabilities of the fund to provide a class of total and permanent disability benefits broader than that covered by section 295-460; and

3. the insurance policy is specified in the regulations; and

4. the fund does not have insurance coverage for the liabilities;

the fund may deduct, under subsection (2), so much of that certified amount as is specified in the regulations.

The above subsections show that a deduction is available to a complying superannuation fund if it is certified by an actuary that, amongst other matters, the fund has:

· specified amounts which are payable in addition to the member account balances;

· death or disability benefits which are in no part provided by external insurance; and

· a segregated insurance reserve that is as large as the actuary has certified.

In your case subsections 295-465(2) and 295-465(2A) of the ITAA 1997 are not satisfied as:

· no amount of the benefit paid in respect of the Member is in excess of the Member's account balance in the Fund;

· you stated the Fund is not self-insured; and

· there is no actuary certificate specifying any amount the Fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide disability benefits.

As the Fund did not pay premiums for an insurance policy or satisfy being self-insured, a deduction cannot be claimed under section 295-465 of the ITAA 1997.

In addition to the above it should also be noted that subsection 295-465(4) of the ITAA 1997 states:

The trustee may choose not to deduct amounts under this section for an income year and to deduct instead (under section 295-470) amounts based on the fund's future liability to pay the benefits.

The effect of subsection 295-465(4) of the ITAA 1997 is that a fund is required to choose between two options to claim a deduction, that is:

o claim a deduction for insurance premiums in the income year in which they are paid (section 295-465 of the ITAA 1997); or

o claim a deduction for it's future liability to pay benefits (section 295-470 of the ITAA 1997).

Further, subsection 295-465(4) of the ITAA 1997 indicates that a fund must already have an entitlement to claim a deduction, for example under subsection 295-65(2) of the ITAA 1997, before it can be entitled to a deduction under section 295-470 of the ITAA 1997.

In your case, as the Fund does not have an entitlement to claim a deduction under section 295-465 of the ITAA 1997, it follows that the ability to make a choice under subsection 295-465(4) of the ITAA 1997 is not available.

Deductions for future liability to pay benefits

Section 295-470 of the ITAA 1997 states, amongst other matters, that a complying superannuation fund can deduct an amount for a future liability to pay benefits if:

(a) the trustee of the fund makes a choice under subsection 295-465(4) of the ITAA 1997 and the choice applies to the income year; and

(b) the trustee pays benefits referred to in section 295-460 of the ITAA 1997.

In view of the above, the first condition that must be satisfied to claim a deduction under section 295-470 of the ITAA 1997 is that the fund must be able to make a choice under subsection 295-465(4) of the ITAA 1997.

In this case as the Fund failed to satisfy subsection 295-465(4) of the ITAA 1997, as discussed earlier, it follows that the Fund is precluded from claiming a deduction for future liability to pay benefits under section 295-470 of the ITAA 1997.

Conclusion

For a complying superannuation fund to claim deductions for future liability to pay benefits (these being for death, a terminal medical condition or disability) all the conditions under section 295-470 of the ITAA 1997 must be satisfied.

One of the conditions is the trustee of a fund makes a choice under subsection 295-465(4) of the ITAA 1997, that is, if the trustee of the fund has an entitlement under section 295-465 of the ITAA 1997 it foregoes that entitlement in favour of claiming a deduction under section 295-470 of the ITAA 1997.

In this case the Fund is not entitled to claim a deduction under section 295-465 of the ITAA 1997. Therefore as the Fund is not entitled to a deduction under section 295-465 of the ITAA 1997 it cannot make a choice under subsection 295-465(4) of the ITAA 1997. Thus as subsection 295-465(4) of the ITAA 1997 is not satisfied the Fund is precluded from claiming a deduction under section 295-470 of the ITAA 1997.

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