Edited version of private ruling

Authorisation Number: 1011704574104

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Ruling

Subject: Deduction for increased amount of superannuation lump sum death benefit

Question

Is a deduction under section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997) for an increased amount of superannuation lump sum death benefit allowable to the superannuation fund?

Answer

No.

This ruling applies for the following period:

2009-10 income year

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The taxpayer (the deceased) was the sole member of a superannuation fund (the Fund) until his death.

The deceased was over 70 years of age.

The deceased's service period in the Fund commenced more than 40 years ago.

The deceased's date of death was during the 2008-09 income year.

Up to the time of death, the deceased was in receipt of two separate pensions from the Fund - Pension #1 (an allocated pension) and pension #2 (a market linked pension).

The deceased had not nominated any reversionary beneficiaries for the pensions.

The balances of the 2 pension accounts in the Fund at 30 June 2009 were as follows:

Pension #1 Amount A

Pension #2 Amount B

During the 2009-10 income year the balances of the pension accounts were as follows:

Pension #1 Amount C

Pension #2 Amount D

Total Amount E

The Fund's accounts during the 2009-10 income indicate the net assets available to pay benefits were Amount E and this amount had vested in respect of the sole member of the Fund, the deceased.

The deceased's benefits from the Fund are to be paid into his estate in a sequence of payments in the 2010 and 2011 financial years. The beneficiaries of the estate include the deceased's wife and adult children.

At present, a total of Amount F has been paid into the deceased's estate during the 2009-10 income year.

Amount F represents the total balance of the deceased Pension #1 account during the 2009-10 income year (Amount C); an amount from the fund's income tax provision (Amount G) and part of the deceased's Pension #2 account (Amount H).

The Fund has labelled Amount G as a 'tax saving amount' as defined in paragraph 295-485 (1)(b) of the ITAA 1997.

Further payments totalling Amount I were made from the Pension #2 account in the period 1 July 2009 to 30 June 2010.

Additional monies were paid from the Pension #2 account in July 2010 with the final remainder to be paid after the Commissioner's decision on this private ruling application is made. The Fund will then be wound up.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 274

Income Tax Assessment Act 1936 Section 279D

Income Tax Assessment Act 1997 Section 295-485

Income Tax Assessment Act 1997 Paragraph 295-485(1)(a)

Income Tax Assessment Act 1997 Paragraph 295-485(1)(b)

Income Tax (Transitional Provisions) Act 1997 Section 295-485

Reasons for decision

Summary

The Trustee the Fund is not entitled to a deduction under section 295-485 of the ITAA 1997 for an increased amount of superannuation lump sum death benefit. The Fund did not have sufficient assets to pay both the death benefit (representing the deceased's account balance at the time of death) and the increased tax savings amount.

Detailed reasoning

Section 295-485 of the ITAA 1997 allows a deduction to a complying superannuation fund or a complying approved deposit fund when:

· it pays a superannuation lump sum because of the death of a person to the trustee of the deceased's estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment (paragraph 295-485(1)(a) of the ITAA 1997); and

· it increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount ) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in assessable income under Subdivision 295-C of the ITAA 1997 and section 274 of the Income Tax Assessment Act 1936 (ITAA 1936) (paragraph 295-485(1)(b) of the ITAA 1997 and section 295-485 of the Income Tax (Transitional Provisions) Act 1997 ).

Therefore, a fund can deduct an amount under section 295-485 of the ITAA 1997 to ensure that the amount of a lump sum death benefit paid (directly or indirectly via an estate) to a spouse, former spouse or child of the deceased is not reduced as a result of contributions being taxed.

Section 295-485 is a re-write of former section 279D of the ITAA 1936 which applied to payments made by a complying superannuation fund (or a complying ADF) to dependants of a deceased member before 1 July 2007.

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2006 which introduced section 295-485 of the ITAA 1997 states that the rewritten provisions in Division 295 of the ITAA 1997 do not change the law as it operated under former Pt IX of the ITAA 1936.

The deduction under section 295-485 of the ITAA 1997 is available so that the death benefit amount is not reduced because of the tax on contributions. The deduction effectively compensates the fund for the tax payable on the contributions that are used to fund the increased death benefit payment.

Section 295-485 of the ITAA 1997 requires the fund to determine the amount that would have been paid as a superannuation lump sum if contributions were not included in the assessable income of the fund. Section 295-160 of the ITAA 1997 includes contributions and certain payments in an entity's assessable income, and where the contributions are included in the assessable income of the fund, the amount available for payment as a superannuation lump sum will be lower. This is due to the tax paid not being available for crediting to the member's account, and subsequently not being available to be invested to earn further income.

A fund which pays this increased amount may claim the deduction (as calculated in accordance with section 295-485(3) from its assessable income in the income year in which the lump sum death benefit is made.

In order to increase the amount it pays as a superannuation lump sum death benefit, a fund requires sufficient assets to pay both the death benefit (representing the deceased's account balance at the time of death) and the increased tax savings amount. The entitlement to a deduction is not a direct refund provided by the Tax Office.

The Commissioner must be satisfied that the tax benefit has been passed on to the relevant beneficiaries and this requires the superannuation fund to have the resources to make the additional amount of death benefits from its own cash-flow, reserves and assets.

In this case the deceased has vested benefits to the total of Amount E in the Fund. This is the same amount as the Fund's 'Net assets available to pay benefits'. As the sole member of the Fund, the deceased (or his beneficiaries) is entitled to the full amount of Amount E. This means the Fund does not have sufficient assets to pay both the death benefit (representing the deceased's account balance) and a tax savings amount. Accordingly, Amount G is not a 'tax savings amount' and no deduction is available under section 295-485 of the ITAA 1997.