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Ruling

Subject: Disability superannuation benefit / self insurance

Questions

Does a disability superannuation benefit, for the purposes of subparagraph 295-470(1)(b)(i) of the Income Tax Assessment Act 1997 (ITAA 1997), have the extended meaning as referred to in the note to paragraph 295-460(b) of the ITAA 1997 for the relevant income years?

Is your client entitled to a deduction for self insurance costs associated with the payment of disability superannuation benefits to its members for the relevant income years?

Answers

Yes.

Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on:

1 July 2007

Relevant facts and circumstances

Your client (the Fund) is a complying superannuation fund within the meaning of section 995-1 of the ITAA 1997.

The Fund provides disability superannuation benefits to its members within the meaning of paragraph 295-460(b) of ITAA 1997.

The Fund does not acquire insurance policies in respect of its current or contingent liabilities to pay disability superannuation benefits. Instead it self insures in respect of these liabilities.

For the relevant income years the Fund has deducted amounts based on its future liability to pay benefits under section 295-470 ITAA 1997.

The trustee for the Fund has stated that they have adopted a rigorous approach to the assessment of a member's entitlement to disability benefits pursuant to its trust deed and rules, notwithstanding that, in some instances it did not require two medical certificates.

It further stated that, in every instance, it obtained at least one medical certification, engaged professional claims assessors to assist it in its assessment of a member's claim, and had extensive review procedures prior to acceptance of a member's claim.

Relevant legislative provisions

Income Tax (Transitional Provisions) Act 1997 Section 307-290

Income Tax Assessment Act 1997 Section 295-470

Income Tax Assessment Act 1997 Section 295-465

Income Tax Assessment Act 1997 Section 295-460

Income Tax Assessment Act 1997 Section 307-145

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Section 295-467

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

Income Tax (Transitional Provisions) Regulations 2010 Subregulation 4(2)

Income Tax (Transitional Provisions) Regulations 2010 Subregulation 4(3)

Reasons for decision

Summary

The extended meaning referred to in the note to paragraph 295-460(b) of the Income Tax Assessment Act 1997 (ITAA 1997) applies to a disability superannuation benefit for the purposes of subparagraph 295-470(1)(b)(i) of the ITAA 1997.

The Fund is therefore entitled to a deduction for self insurance costs associated with the payment of disability superannuation benefits to its members for the relevant income years to the extent that the disability can be described as one or more of the disabilities listed in subregulation 4(3) of the Income Tax (Transitional Provisions) Regulations 2010.

Detailed reasoning

Sections 295-460 and 295-465 of the Income Tax Assessment Act 1997 (ITAA 1997) generally provide that a fund can deduct insurance premiums to provide disability superannuation benefits. For the purposes of these provisions, a disability superannuation benefit is defined in subsection 995-1(1) of ITAA 1997 as follows:

"disability superannuation benefit" means a superannuation benefit if:

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

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

It is important to note the requirement in paragraph (b) of the above definition, i.e. that the disability must effectively be certified by 2 legally qualified medical practitioners.

In response to established industry views and practice regarding the deduction of insurance premiums to provide disability superannuation benefits, the Superannuation Legislation Amendment Act 2010 extended the meaning of a disability superannuation benefit for the relevant income years by inserting section 295-466 into the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997). Section 295-467 of the ITTPA 1997, which pertains to deductions for self insurance payments, was inserted by the Tax Laws Amendment (2011 Measures No.4) Act 2011. Not unlike sections 295-460 and 295-465 of the ITAA 1997, these transitional provisions permit superannuation funds to deduct insurance and self insurance premiums to provide disability superannuation benefits for members of the fund.

However, to be a disability superannuation benefit within the meaning of section 295-466 of the ITTPA 1997, the disability must be a 'permanent disability', which, according to paragraph (a) of subregulation 4(2) of the ITTPR 2010 is a disability about which a trustee of a superannuation fund or an insurer requires 'reasonable medical evidence' before a member is eligible for superannuation benefits conditional on the member's disability. It also must be able to be described as one or more of the disabilities described in subregulation 4(3) of the ITTPR 2010.

There is no prescription in regulation 4 of the ITTPR 2010 that requires the provision of one or more medical certificates in order to establish the existence of a permanent disability. The definition of disability superannuation benefit in the context of the transitional provisions is therefore much less stringent than the definition articulated in subsection 995-1(1) of the ITAA 1997 for the purposes of sections 295-460 and 295-465 of the ITAA 1997.

Paragraphs 2.26, 2.40 and 2.41 and of the Explanatory Memorandum to the Superannuation Legislation Amendment Act 2010 confirm this legislative intention to expand the definition of disability superannuation benefits in relation to section 295-466 of the ITTPA 1997 in the following terms:

2.26 The transitional relief allows complying superannuation funds to deduct in full the insurance premiums commonly regarded as TPD policy premiums. This is achieved by allowing, in the transitional period, broader definitions of 'death or disability benefits' in the ITAA 1936 and 'disability superannuation benefit' in the ITAA 1997 to the extent they relate to the deductibility of TPD insurance premiums.

2.40 In effect, the current law provides that premiums for a TPD policy will only be deductible if an event that triggers a payout under the insurance policy would also trigger the permanent incapacity condition of release of benefits in SIS Regulations 1994. (For more details, see paragraphs 2.4 to 2.9.)

2.41 The transitional provisions mean that there would not be a necessary nexus between the payout by the insurer to the fund and the satisfaction of the permanent incapacity condition of release of benefits to members.

A similar legislative intent is stipulated in the Explanatory Statement (ES) to the Income Tax (Transitional Provisions) Regulations 2010 (which gave effect to regulation 4 of the ITTPR 2010) as follows:

Legislative amendments to the Act and the ITAA 1997, contained in the Superannuation Legislation Amendment Act 2010 (SLAA), allow superannuation funds to treat a broader range of premiums as deductible premiums. This is achieved by allowing, in the transitional period, broader meanings of the terms 'disability superannuation benefit' in the ITAA 1997 and 'death or disability benefits' in the ITAA 1936 to the extent they relate to the deductibility of TPD insurance premiums. These terms will be given the broader, transitional meaning if the insured disability to which they relate is described as a permanent disability for the purposes of the transitional provisions.

The Explanatory Memorandum to the Tax Laws Amendment (2011 Measures No.4) Act 2011 (the EM) confirms that the extension to the meaning of disability superannuation benefit in the Superannuation Legislation Amendment Act 2010 also applies to superannuation funds that self insure their liability to provide such benefits via the insertion of section 295-467 of the ITTPA 1997. Paragraphs 3.22 and 3.23 of the EM provide as follows:

3.22 Under section 295-466 of the IT(TP) Act the terms 'disability superannuation benefit' in the ITAA 1997, and 'death or disability benefits' in the ITAA 1936 have an expanded meaning for the period 2004-05 to 2010-11. Specifically, the meaning of these terms is broadened to cover a benefit that is conditional on the disability of the member, and the disability to which it relates is described as a permanent disability in regulations made for the purpose of section 295-466.

3.23 New section 295-467 is inserted into the IT(TP) Act to allow self-insuring funds to use the expanded meaning of the term 'disability superannuation benefit' in section 295-466 of the IT(TP) Act for the income years 2007-08 to 2010-11.

The above demonstrates that parliament intended the definition of a disability superannuation benefit for the purposes of sections 295-466 and 295-467 of the ITAA 1997 to be much broader than that articulated in subsection 995-1(1) of the ITAA 1997.

To view the 'reasonable medical evidence' requirement as importing the same evidentiary requirements stipulated in the definition of disability superannuation benefits in subsection 995-1(1) of the ITAA 1997 is contrary to the clear legislative intention underpinning regulation 4 of the ITTPR 2010 and the transitional provisions to which it relates.

As such, the plain words of paragraph (a) of subregulation 4(2) of the ITTPR 2010 must apply as they are written, viewed in light of the legislative intention underpinning the insertion of this regulation and the related transitional legislation.

Regulation 4 of the ITTPR 2010 does not define the term 'reasonable medical evidence', nor does the ES to the Income Tax (Transitional Provisions) Regulations 2010 other than to stipulate that a 'certain level of evidence' must be provided before a disability will be considered a permanent disability.

It is not possible to apply a standard definition of what constitutes 'reasonable medical evidence'. Applying this test requires an objective assessment of the facts on a case by case basis. Ultimately, what constitutes 'reasonable medical evidence' will be an issue for the trustee of the fund to resolve, but it is worth noting that the evidence must be medical in nature. It might not take the form of a certificate but might include reports, opinions or other documentation.

In this case, the Fund obtained at least one form of medical certification and engaged professional claims assessors to assist it in performing an assessment of a member's claim. On balance, this information would appear to constitute 'reasonable medical evidence' for the purposes of paragraph (a) of subregulation 4(2) of the ITTPR 2010 and within the scope of the legislative intent underpinning the transitional provisions in the ITTPA 1997.

As stated previously, the disability must also be able to be described as one or more of the disabilities listed in subregulation 4(3) of the ITTPR 2010. As such, the Fund is entitled to a deduction for self insurance costs associated with the payment of disability superannuation benefits to its members for the relevant income years to the extend that the disability can be described as one or more of the disabilities listed in the abovementioned subregulation.

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