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Edited version of your private ruling

Authorisation Number: 1012396353354

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Ruling

Subject: Tax losses and exempt pension income in a superannuation fund

Question

In a fully segregated self managed superannuation fund (SMSF) are the tax losses accounted for at a fund level under section 36 of the Income Tax Assessment Act 1997 (ITAA 1997) and therefore offset against the net exempt income?

Answer

Yes.

This ruling applies for the following period

For years ended 30 June 2009 to 30 June 2012

The scheme commenced on

1 July 2008

Relevant facts

You have a fully segregated SMSF in terms of its members, their assets, their investment strategies, and the asset pools in accumulation and pension phases.

There are segregated members, some are in 100% accumulation phase and some are in 100% pension phase.

You received a letter requesting that you review SMSF return because you had made a claim for exempt current pension income (ECPI). The letter indicated that a common error made in returns is: 'Incorrectly offsetting losses - where a fund has income tax losses (ie not capital losses), these first need to be offset against ECPI. Any remaining tax losses can be offset against assessable income of the fund.'

In your tax return you have shown assessable income minus allowable deductions in relation to that assessable income is a loss. There is also ECPI. You have shown the full amount of losses as carried forward losses from this year.

In the next year return you have used part of the carried forward losses to reduce your taxable income to nil and carried forward the remaining losses.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 36-10

Income Tax Assessment Act 1997 Section 36-20

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Division 36 of the ITAA 1997 - 'Tax losses of earlier income years' is a general division that applies to all types of entities.

Section 36-10 of the ITAA 1997 sets out the rules of how to calculate a tax loss for an income year:

Note: For an Australian resident the net exempt income is the amount by which your total exempt income from all sources exceeds the total of any losses or outgoings (except capital losses and outgoings) you incurred in deriving the exempt income and any taxes payable outside Australia on that exempt income.

You have indicated that you have a fully segregated SMSF where one member is in the 100% pension phase. Ordinary income and statutory income that a complying SMSF earns from assets held to provide for super income stream benefits is exempt from incomer tax. This is referred to as ECPI. This ECPI is allowed as a deduction from the total income so that it is not assessed.

When preparing your annual superannuation fund tax return expenditure incurred in gaining or producing exempt income only is not deductible. Expenses incurred in deriving both assessable and exempt income have to be apportioned. These are general deduction rules under section 8-1 of the ITAA 1997.

To determine if there is a tax loss in a superannuation fund the general rule in section 36-10 of the ITAA 1997 will apply. There is no apportionment due to the segregated accounts. Once you have calculated the allowable deductions minus the assessable income, which in your case for the income year was a loss, you then have to deduct the net exempt income. The net exempt income will be the ECPI less any losses or outgoings (except capital losses and outgoings) you incurred in deriving that exempt income. From the calculation attached to your private ruling request it appears that the losses will be reduced to nil by the net exempt income.

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