Edited version of private ruling

Authorisation Number: 1011817026582

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Ruling

Subject: Superannuation lump sum death benefits - taxed and untaxed elements

Issue

Questions

Does section 307-290 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to a lump sum superannuation death benefit where deductions for insurance premiums had previously been claimed under section 295-465 and the insurance policy is subsequently allowed to lapse?

Advice/Answers

No.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

Your client is a member of a superannuation fund (the Fund).

Some years ago, the Fund owned a term life insurance policy, in respect of your client, and claimed deductions for the annual premiums under section 295-465 of the ITAA 1997. The cost of this cover was deducted from your client's account.

The policy was cancelled some time before the start of the 2008 financial year and is no longer in force. On the death of your client, the Fund will not receive any life insurance proceeds under the former policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-465.

Income Tax Assessment Act 1997 Section 295-470.

Income Tax Assessment Act 1997 Section 307-290.

Income Tax Assessment Act 1997 Subsection 307-290(1).

Income tax (Transitional Provisions) Act 1997 Section 307-290.

Reasons for decision

Summary

When lump sum superannuation death benefits includes proceeds from a life insurance policy, an element untaxed in the fund of the taxable component would apply.

However, in this case it is not appropriate to include an element untaxed as when the lump sum superannuation death benefit is paid it will not include any proceeds from the life insurance policy.

Detailed reasoning

Section 307-290 of the Income Tax Assessment Act 1997 (ITAA 1997), applies to include an element untaxed in the fund of the taxable component of a lump sum superannuation death benefit, when a superannuation fund has claimed, or intends to claim, a deduction under section 295-465 or 295-470.

As Note 2 to subsection 307-290(1) of the ITAA 1997 states, section 307-290 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) provides that, for the purposes of section 307-290 of the ITAA 1997, a deduction made under former section 279 or 279B of the Income Tax Assessment Act 1936 is to be treated as having been made under section 295-465 or 265-470 of the ITAA 1997 instead.

The Tax Office considers that the ordinary meaning of the words 'a deduction has been, or is to be, claimed' in subsection 307-290(1) of the ITAA 1997, is not that a deduction must have been made in every income year for life insurance linked to the member's superannuation interest. Nor is it necessary for a deduction to be, or have been, claimed in relation to the particular year in which the superannuation lump sum death benefit is payable. Rather, the ordinary meaning of the words will be satisfied if a deduction has been, or is to be claimed, in relation to the benefit in any year of income.

This view is consistent with the operation of subsection 27AB(3) of the ITAA 1936 on which section 307-290 of the ITAA 1997 is based. The Explanatory Memorandum to the Tax Laws Amendment (Superannuation Simplification) Bill 1996 does not indicate any intention to alter the operation of the law from subsection 27AB(3) of the ITAA 1936. An untaxed element was calculated under subsection 27AB(3) of the ITAA 1936 if the relevant deduction had been claimed 'in any year'.

Furthermore, at Schedule 1, item 1 section 307-290 of the ITAA 1997 the Explanatory Memorandum to the Tax Laws Amendment (Simplification Superannuation) Bill 2006 states:

2.117 If a superannuation provider has claimed a tax deduction in respect of an insurance premium, the element untaxed in the fund of a lump sum superannuation death benefit is increased to broadly reflect the insurance component of the superannuation death benefit. The deductibility of insurance premiums broadly results in no contributions or earnings tax having been paid on this component of the superannuation death benefit. [Schedule 1, item 1, section 307-290]

Therefore, it does not matter that the fund did not claim a deduction under section 295-465 of the ITAA 1997 in a future year. The fund had claimed a deduction under section 279 of the ITAA 1936 and section 295-465 of the ITAA 1997 in relation to the member in prior years. Section 307-290 of the ITAA 1997 would apply to include an element untaxed in the fund of the taxable component when lump sum superannuation death benefits include proceeds from a life insurance policy.

However, in this case, the life insurance policy was cancelled some time before the start of the 2008 financial year and is no longer in force. More importantly, the Fund will not be receiving any proceeds from the policy which in turn means any benefits paid by the Fund will not include proceeds from the insurance policy.

Therefore, it would not be appropriate to apply section 307-290 of the ITAA 1997 as when the lump sum superannuation death benefit is paid it will not include a life insurance component from under the previous policy.