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Ruling

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

Question 1

Will the Commissioner accept that the methodology is an appropriate and reasonable methodology for calculating the quantum of the 'tax savings amount' under paragraph 295-485(1)(b) of the ITAA 1997 where a superannuation lump sum is paid because of the death of a pension member, if it is calculated as:

(0.15*P) / (R-0.15*P)*C

Where:

P = The number of days in component R that occur after 30 June 1988.

R = the total number of days in the service period as defined in section 307-400 of the ITAA 1997 that occur after 30 June 1983.

C = The taxable component of the lump sum calculated under sections 307-120 and 307- 125 of the ITAA 1997, as if no deduction under subsection 295-485(2) of the ITAA 1997 were allowed, after excluding the actual (if any) insured amount for which deductions have been claimed under sections 295-465 or 295-470 of the ITAA 1997.

Answer

Yes

This ruling applies for the following period

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2011

Relevant facts and circumstances

Background

1. The superannuation fund (the Fund) is, and has been since it came into existence, a complying superannuation fund.

2. It is an accumulation fund. It is not a defined benefit fund. The Fund is a taxed superannuation fund. There are no elements untaxed in the fund.

3. The Trust Deed for the Fund allows it to pay benefits by way of pensions and for regulations to be made setting out the form and types of pensions to be provided and their terms and conditions. Pension regulations have been established and cater for the payment of Account-Based Pensions (ABPs) and Transition to Retirement Pensions (TRPs).

4. The Trust Deed requires the Trustee to establish a Pension account in respect of the pensioner and specifies the amounts that are credited and debited to that account.

5. The Trust Deed sets out who a death benefit is to be paid to.

6. An account based pension can be commuted to a lump sum in whole or in part on the death of the member or reversionary pensioner.

7. Members may transfer superannuation benefits from other superannuation funds to the Fund. The details of the benefits transferred from other superannuation funds do not include the actual effect of tax paid on contributions by that fund (or any other preceding funds).

Scheme

8. The Trustee of the Fund intends to pay the whole of a death benefit as a lump sum on the death of a member who was receiving an account- based pension at time of death. It will not be paid as a reversionary pension. The death benefit will be paid wholly for the benefit of an individual who was a spouse, former spouse or child of the deceased at the time of death either directly to them or indirectly via a payment to the deceased estate of the member.

9. The amount of the lump sum death benefit is the member's account balance at the end of the accumulation phase (which is net of tax on contributions and investment income) increased by investment income derived during the pension phase, less fees deducted from the pensioner's accounts and payments to the pensioner (both pension and payment and any lump sum payments, where applicable).Once the lump sum is paid the deceased member's account will be reduced to nil.

10. The Trustee intends to pay an additional amount representing the 'tax saving amount' to the eligible recipients of the death benefit.

11. The fund cannot calculate the amount of tax paid on amounts in the member's accounts as its records do not track the effects of tax on contributions in individual accounts over the membership period.

12. The Trustee intends to pay the lump sum under paragraph 6.21(2)(a) of the Superannuation Industry (Supervision) Regulations 1994(SISR 1994).The benefit will be paid as a lump sum as soon as practicable after the member dies.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 295-C.

Income Tax Assessment Act 1997 Section 295-465.

Income Tax Assessment Act 1997 Section 295-470.

Income Tax Assessment Act 1997 Section 295-485.

Income Tax Assessment Act 1997 Subsection 295-485(1)

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

Income Tax Assessment Act 1997 Subsection 295-485(2)

Income Tax Assessment Act 1997 Subsection 295-485(3)

Income Tax Assessment Act 1997 Subsection 295-485(4)

Income Tax Assessment Act 1997 Section 307-65.

Income Tax Assessment Act 1997 Subsection 307-70(1).

Income Tax Assessment Act 1997 Subsection 307-120.

Income Tax Assessment Act 1997 Subsection 307-125

Income Tax Assessment Act 1997 Subsection 307-400).

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act 1936 Section 274

Income Tax Assessment Act 1936 Section 279D

Income Tax Assessment Regulations 1997 Regulation 995-1.01.

Income Tax Assessment Regulations 1997 Regulation 995-1.03.

Retirement Savings Account Regulations 1997 Regulation 1.07.

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.05(1).

Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(1).

Superannuation Industry (Supervision) Regulations 1994 Regulation 1.07D.

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(1).

Superannuation Industry (Supervision) Regulations 1994 Paragraph 6.21(1)(a).

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(2A).

Reasons for decision

Question 1

Detailed reasoning

Use of the formula

Subsection 295-485(1) of the ITAA 1997 allows a deduction to a complying superannuation fund or a complying approved deposit fund when:

(a) 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; and

(b) 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 former section 274 of the Income Tax Assessment Act 1936 (ITAA 1936).

The provision 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.

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) for the benefit of a spouse, former spouse or child of the deceased is not reduced as a result of contributions being taxed.

Subsection 295-485(3) of the ITAA 1997 provides that the amount a fund can deduct is calculated by the formula:

Tax saving amount / Low tax component rate

   where:

    low tax component rate is the rate of tax imposed on the low tax component of the fund's taxable income for the income year (i.e. 15%)

As the whole of the lump sum death benefit will be for the benefit of a spouse, former spouse or child of the deceased, the subsection 3 amount will not be reduced under subsection 295-485(4)

Section 295-485 of the ITAA 1997 is a rewrite of former section 279D of the ITAA 1936. Section 279D applied to payments made before 1 July 2007.

Section 279D of the ITAA 1936 allowed a deduction to a superannuation fund which paid a death benefit to a dependant of the deceased member where the fund increased the benefit to the amount that would have been paid had there been no tax on contributions. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Superannuation) Bill 1989, which inserted section 279D, prescribed a method of calculation which would provide an acceptable basis for determining the amount that could be deducted under section 279D. This formula provided an alternative to the calculation of the relevant amount by the auditor of the fund where the fund was not a defined benefit fund.

ATO ID 2006/290 gave approval to a method of calculation of the deduction under section 279D of the ITAA 1936. The method endorsed in ATO ID 2006/290 provided an updated version of the formula contained within the EM and was more appropriate than that formula in the situation of an accumulation fund.

The method of calculation contained within ATO ID 2006/290 was updated in ATO ID 2007/219 to take into account the amendments to the income tax legislation affecting superannuation funds that apply after 30 June 2007. ATO ID 2007/219 referred to the situation where the superannuation fund could not calculate the tax paid on amounts in the member's accounts as the fund's records 'do not track the effect of fund tax on individual accounts over the membership period'.

However, the formula in ATO ID 2007/219 is also appropriate in situations where the Fund's records do not track the effect of fund tax on the accounts of individual members but the Fund may be able to calculate the amount of tax paid on amounts in these accounts if it was to reconstruct those accounts from its records to take into account the effect of fund tax on the individual accounts over the membership period.

The calculation method stated above is consistent with the formula in ATO ID 2007/219 and calculates an approximate 'tax saving amount' so as to give effect to the intention of section 295-485 of the ITAA 1997.

Superannuation lump sum

By virtue of subsection 995-1(1) of the ITAA 1997 a superannuation lump sum is defined in section 307-65 as a superannuation benefit that is not a superannuation income stream benefit.

Under subsection 307-70(1) of the ITAA 1997, a superannuation income stream benefit is a superannuation benefit specified in the regulations that is paid from a superannuation income stream.

A superannuation income stream benefit is defined in regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR1997) as a payment from an interest that supports a superannuation income stream, other than a payment to which regulation 995-1.03 applies.

Superannuation income stream is defined in regulation 995-1.01 of the ITAR 1997 to mean:

(a) an income stream that is taken to be:

(i) an annuity for the purposes of the Superannuation Industry (Supervision) Act 1993 (SIS Act) in accordance with subregulation 1.05(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR); or

(ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SISR; or

(iii) a pension for the purposes of the Retirement Savings Account Act 1997 in accordance with regulation 1.07 of the Retirement Savings Account Regulations 1997; or

(b) an income stream that:

(i) is an annuity or pension within the meaning of the SIS Act; and

(ii) commenced before 20 September 2007.

In accordance with regulation 1.07D of the SISR, a superannuation income stream (as defined in regulation 995-1.01 of the ITAR 1997) can be commuted, in whole or in part, on the death of the recipient or the reversionary beneficiary.

When a beneficiary who is a child, spouse or former spouse, of a deceased member commutes their entitlement to a superannuation income stream into a superannuation lump sum, and the commutation occurs before the superannuation income stream benefit is paid, the superannuation income stream ceases to exist.

Thus, it cannot be said that a subsequent payment of a superannuation benefit is made from an interest that supports a superannuation income stream. As the superannuation benefit is not paid from an interest that supports a superannuation income stream, it is not a superannuation income stream benefit under subsection 307-70(1). Rather, it is a superannuation lump sum as defined section 307-65 of the ITAA 1997.

Superannuation lump sum paid 'because of' the death of a person

The phrase 'because of' is not defined in ITAA 1997; therefore its meaning is to be determined according to its ordinary meaning having regard to the context in which it appears.

The Macquarie dictionary defines 'because of' as:

phrase

2. because of, by reason of; on account of: the game was abandoned because of rain.

Lockhart J examined the phrase `by reason of' in the context of the Sex Discrimination Act 1984 in Human Rights and Equal Opportunity Commission v Mt Isa Mines (1993) 118 ALR where he said at 321-22:

In my opinion the phrase `by reason of' in s 5(1) of the SD Act should be interpreted as meaning `because of', `due to', `based on' or words of similar import which bring something about or cause it to occur. The phrase implies a relationship of cause and effect between the sex (or characteristic of the kind mentioned in s 5(1)(b) or (c)) of the aggrieved person and the less favourable treatment by the discriminator of that person.

Also, in the context of Sex Discrimination Act 1984, in Jones v Scully [2002] FCA 1080 Hely J said at 114:

The phrase "because of" requires consideration of the reason or reasons for which the relevant act was done: Hagan (Full Federal Court) [2001] FCA 123; (2001) 105 FCR 56 at 60. It is important to note that if an act is done for one or more reasons, it is enough that one of the reasons is the race, colour or national or ethnic origin of a person or group of people, whether or not it is the dominant reason or a substantial reason for doing the act …

In Creek v Cairns Post Pty [2001] FCA 1007 Kiffel J [at 27] said:

I should add that Lockhart J in Human Rights and Equal Opportunity Commission v Mt Isa Mines (321-2) equated the words "by reason of" with "because of", "due to", "based on", "or words of similar import which bring something about or cause it to occur"; although it seems to me that "because of" perhaps marks out the causal requirement more clearly.

In McIntosh v FC of T 79 ATC 4325 the taxpayer was eligible to receive a pension following his retirement as a bank officer. One week after his retirement he elected to commute half his pension to a lump sum. He argued that the lump sum was a capital receipt in his hands and that subsection 26(d) did not apply. The taxpayer argued that the phrase 'in consequence of' in subsection 26(d) of the ITAA 1936 meant 'caused by' and here the cause of the payment was the exercise of his right of commutation, not the retirement.

The construction contended for by the taxpayer was rejected by the Federal Court. For Brennan J (at p 4328) the payment was made 'in consequence of' retirement because the taxpayer's retirement was the occasion of and a condition of entitlement to the payment. For Toohey J (at p 4331) it was because the retirement was a prerequisite to payment. For Lockhart J (at p 4336) it was enough that the retirement was a condition precedent to the payment.

In accordance with subregulation 6.21(1) of the Superannuation Industry (Supervision) Regulation 1994 (SISR 1994), a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after a member's death. Subregulation 6.21(2A) provides that the cashing of these benefits must be in form of a lump sum unless the recipient is a dependant of the member; and in the case of a child of the member, is less than 18 years of age or is financially dependent on the member (and is less than 25 years of age), or has a disability.

Therefore, if a superannuation lump sum death benefit is paid for the benefit of a beneficiary who is a child, spouse or former spouse of the deceased member, who had commuted their entitlement to a superannuation income stream before a superannuation benefit was paid, the superannuation benefit is paid 'because of' the death of the person rather than 'because of' the commutation. This is because the death of the person is the cause/reason for the payment, and in certain cases, is a condition precedent to the payment of the benefit.