Edited version of private advice

Authorisation Number: 1051563492569

Date of advice: 27 August 2019

Ruling

Subject: Deductions for insurance premiums

Question 1

Is the benefit that was paid to the Fund by the Insurer in respect of an insurance policy held by the Fund's member a benefit for which deductions are available under section 295-460 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the benefit paid to the Fund by the Insurer is a benefit for which deductions are available under section 295-460 of the ITAA 1997.

Question 2

Can a trustee of a complying superannuation fund make a choice under subsection 295-465(4) of the ITAA 1997 to claim a deduction under section 295-470 of the ITAA 1997, and if so, to what extent?

Answer

Yes, however, the amount of deduction needs to be decreased by that part of the premium that was claimed previously as a deduction under section 295-465 and/or refunded to the Fund and also by the amount that does not represent contingent liability.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund is a complying self-managed superannuation fund.

The members of the Fund are directors of the corporate trustee of the Fund.

In the 20XX-XX income year, one of the Fund's member was diagnosed with a terminal illness.

The Fund has maintained life insurance policies with the Insurer for all the members of the Fund.

The Fund has previously claimed deduction for the premium paid in respect of the Policies under section 295-465 of the ITAA 1997.

In the 20XX-XX income year the Fund made a claim with the Insurer in respect of its member's Policy.

Pursuant to the terms of the Policy, the Insurer paid a benefit, comprising of the Sum Insured, Loyalty Bonus and Premium Refund.

The member was a full time employee of the employer before the member's diagnosis.

As a result of the member's illness the member ceased the employment with the employer.

The Fund trustee paid the terminal medical condition (TMC) benefit to its member in a consequence of the termination of the member's employment.

The Fund's trust deed allowed the full payment of the TMC benefit to its member.

For the 20XX-XX income year, the fund had not claimed any tax deduction for the insurance premium of the Policy.

The Fund made a choice under subsection 295-465(4) of the ITAA 1997 to claim a deduction under section 295-470 of the ITAA 1997.

On XX/mth/20XX your authorised representative provided us with the following documents:

·         A copy of a "Statement of Employment and Earnings", showing the member's period of employment.

·         A copy of a Claim lodged with the Insurer containing two certifications from two registered medical practitioners of which at least one is specialist practicing in an area related to the illness of the member. The certification period for each certification had not ended.

·         A copy of a Claim" detailing the insurance payment that was made by the Insurer to the Fund for its member.

On XX/mth/20XX your authorised representative, provided us with the following information:

·         An extract of the Fund's executed deed of variation.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-460

Income Tax Assessment Act 1997 Paragraph 295-460(aa)

Income Tax Assessment Act 1997 Section 295-465

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

Income Tax Assessment Act 1997 Section 295-470

Income Tax Assessment Act 1997 Subsection 295-470(1)

Income Tax Assessment Act 1997 Subsection 295-470(2)

Income Tax Assessment Regulations 1997 Subregulation 303-10.01

Reasons for decision

Summary

The TMC benefit that was paid to the Fund's member is a benefit listed in section 295-460 of the ITAA 1997 for which deductions for insurance premiums are available.

As you have advised us that the trustee of the Fund made valid choice under subsection 295-465(4) of the ITAA 1997 to deduct under subsection 295-470 of the ITAA 1997, and the benefit meets requirements of this provision, the trustee of the Fund can deduct amount calculated in accordance with formula listed under subsection 295-470(2) of the ITAA 1997.

Detailed reasoning

The legislation that governs the deductibility of an insurance premium paid by a complying self-managed superannuation fund (SMSF) on behalf of its member/s is contained in sections 295-460; 295-465 and 295-470 of the ITAA 1997. For any insurance premiums paid by an SMSF to be deductible pursuant to sections 295-465 or 295-470 of the ITAA 1997, the premiums must be wholly or partly for the contingent liabilities of the Fund to provide a benefit specified under section 295-460 of the ITAA 1997.

Section 295-460 of the ITAA 1997 states that deductions for insurance premiums available to complying SMSFs apply to the following benefits:

(a)  a superannuation death benefit;

(aa) a benefit consisting of an amount payable to an individual because of a terminal medical condition exists in relation to the individual;

(b)  ...

The meaning of TMC is captured under regulation 303-10.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997). This regulation states that TMC exists in relation to a person at a particular time if the following circumstances exist:

(a)  two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period) that ends not more than 24 months after the date of the certification;

(b)  at least one of the registered medical practitioners is a specialist practicing in an area related to the illness or injury suffered by the person;

(c)  for each of the certificates, the certification period has not ended.

You provided sufficient evidence to support that the benefit you are seeking this ruling for meets the requirements of TMC.

As the benefit that was paid to the member meets the requirement of TMC, a deduction of insurance premiums is available to the Fund under paragraph 295-460(aa) of the ITAA 1997.

Accordingly, a complying SMSF that provides TMC benefit to its member can claim deduction for a specified amount that is part of a premium which is wholly for the contingent liability to provide TMC benefit or so much of the premium that is attributable to the contingent liability to provided TMC benefit under either section 295-465 or 295-470 of the ITAA 1997, but not both.

Section 295-470 of the ITAA 1997 states that a complying superannuation fund can deduct amount under this section for an income year if:

(a)  the trustee of the funds make a choice under subsection 295-465(4) and the choice applies to the income year; and

(b)  the trustee pays:

(i)            a benefit referred to in paragraph 295-460(a); (aa) or (b) for the income year in consequence of the termination of a member's employment; or

(ii)      a benefit referred to in paragraph 295-460(c).

Based on the provided information the trustee of the Fund can deduct an amount under section 295-470 of the ITAA 1997 as you advised us that the trustee made a valid choice under section 295-465(4) of the ITAA 1997 and the benefit is a benefit referred to in paragraph 295-460(aa) of the ITAA 1997.

For the above listed reason, the Fund is allowed to deduct an amount of a benefit calculated using formula in subsection 295-470(2) of the ITAA 1997, in the 2018-19 income year.

Please note that prior the calculation the benefit amount needs to be decreased by that part of the premium that was claimed previously as a deduction under section 295-465 and/or refunded to the Fund and also by the amount that does not represent the contingent liability.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).