Edited version of your private ruling

Authorisation Number: 1012489426702

Ruling

Subject: Exempt current pension income

Question

Are a proportion of expenses incurred by the Fund allowable deductions in the 2011-12 income year?

Advice/Answers

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The Members and their children are members of the Fund.

The Fund is a complying self-managed superannuation fund established in the 20XX-YY income year.

The Fund X has a corporate trustee.

The benefits provided by the Fund comprise of accumulation and account-based accounts.

The assets of the Fund are unsegregated.

During the 2011-12 income year the Fund derived income in the form of rent, interest and dividends.

In the 2011-12 income year the Fund received concessional contributions and non- concessional contributions.

You provide that none of the above income was non-arm's length income.

During the 2011-12 income year the Fund incurred the expenses.

All expenses except the actuary fee, ASIC fee, ATO fee, Audit fee and Bank fee relate solely to the gaining of rental income by the Fund.

An actuary's certificate certifies the proportion of the applicable income of the Fund for the 2011-12 income year that should be exempt from income tax

Both the Members have been receiving account based pensions since the 2011-12 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Subdivision 295-F.

Further issues for you to consider

Does Part IVA apply to this ruling?

No.

Reasons for decision

Summary

The Fund is entitled to claim a deduction. However, as a proportion of the applicable income of the Fund for the 2011-12 income year that is exempt from income tax the deduction must be apportioned between the exempt income and the assessable income of the Fund.

Detailed Reasoning

Deduction for complying superannuation funds

The deductibility of expenditure incurred by a complying superannuation fund is determined under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) unless a specific provision applies. Generally, the expenditure of a superannuation fund, which is not of a capital, private or domestic nature, is deductible under section 8-1 of the ITAA 1997 to the extent that:

· it has the essential character of an outgoing incurred in gaining or producing assessable income, or

· it has the character of an operating or working expense of a business or is an essential part of the cost of the superannuation fund's business operations.

Taxation Ruling TR 93/17 (TR 93/17) entitled 'Income Tax: income tax deductions available to superannuation funds' which explains the general principles governing the tax deductibility of expenditure incurred by superannuation funds states at paragraphs 6 and 7:

6. Expenditure incurred in gaining or producing exempt income only is not deductible. Expenditure (eg general administrative expenses of managing a superannuation fund) which is incurred partly in producing assessable income and partly in gaining exempt income must be apportioned. The expenditure is deductible only to the extent to which it is incurred in producing assessable income. Each of the expenses listed in paragraph 4 would need to be apportioned if it is incurred partly in producing assessable income and partly in producing exempt income.

7. The correct method for apportioning expenditure between assessable income and exempt income depends on the particular circumstances of the case. If there is a single outlay in respect of a thing or service, only part of which is used for gaining or producing assessable income, then the following principles apply:

(a) If a distinct and severable part of the thing or service is devoted to gaining or producing assessable income and part is not, the expenditure can be apportioned according to the ratio of those parts. Where possible a superannuation fund should apportion its expenditure in this way.

(b) If an outlay serves both objects indifferently, another method must be used to apportion the expenditure which gives a fair and reasonable assessment of the extent to which it relates to assessable income.

As income derived from assets used to support pension payments are exempt from income tax superannuation funds cannot claim a deduction for expenses relating to those assets.

Where an expense is incurred that relates to both the accumulation and pension phase of a superannuation fund, the expense must be apportioned so that only the proportion relating to the production of assessable income is claimed as a deduction.

The correct method for apportioning expenditure will depend on the particular circumstances of the case and must give a fair and reasonable assessment of the extent to which the expense relates to assessable income.

Exempt current pension income

Subdivision 295-F of the ITAA 1997 operates to exempt from income tax some of the income of a superannuation fund. This income includes the income earned from assets that are used to pay current superannuation income stream benefits.

There are two ways to claim a tax exemption in respect of the current pension income in an income year. These depend on whether the superannuation funds assets, at the time the pension starts to be paid, are:

· segregated current pension assets; or

· unsegregated current pension assets.

A superannuation fund has unsegregated current pension assets at a time if the assets are not specifically set aside to enable the superannuation fund to discharge all or part of its liabilities (contingent or not) in respect of superannuation income stream benefits that are payable by the superannuation fund at that time.

In this case, the Members and their children are members of the Fund. The benefits provided by the Fund comprise of accumulation and account-based accounts. The assets of the Fund are unsegregated.

An actuary's certificate certifies the proportion of the applicable income of the Fund for the 2011-12 income year that should be exempt from income tax

During the 2011-12 income year the Fund incurred expenses:

· All expenses except the actuary fee, ASIC fee, ATO fee, Audit fee and Bank fee relate solely to the gaining of rental income by the Fund.

· The proportion of the applicable income of the Fund for the 2011-12 income year that is exempt from income tax must be proportioned.

Therefore, the Fund may claim a deduction representing the expenditure incurred in gaining or producing the assessable income of the Fund.

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