Edited version of private ruling

Authorisation Number: 1011877667287

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Ruling

Subject: Death and Disability cover

Question

Are you entitled to a deduction for the cost of the compulsory contributions to a Death and Disability Scheme?

Answer

No.

This ruling applies for the following periods

Year ended 30 June 2009

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commenced on

1 July 2008

Relevant facts

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

· the application for private ruling,

· additional information, and

· relevant employment award.

You are an employee.

You employer introduced a Death and Disability Scheme.

You are required to make compulsory contributions for premium cover as a part of award employment conditions, regardless of your personal insurance cover.

The Death and Disability Cover is managed by a superannuation fund. The insurance provides for the payment of a lump sum payment.

The voluntary contributions are deducted pre-tax.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature or relate to the earning of exempt income.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478, 

· there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

In Commissioner of Taxation v. Cooper (1991) 29 FCR 177; 91 ATC 4396; (1991) 21 ATR 1616 (Cooper), Hill J said:

 ...the fact that the employee is required, as a term of his employment, to incur a particular expenditure does not convert expenditure that is not incurred in the course of the income producing operations into a deductible outgoing.

In your case, the compulsory contributions for your Death and Disability cover are deducted from your pre-tax earnings. In such circumstances, you forgo an expected entitlement to an amount of salary and wages before it is earned in return for benefits of a similar value. The amount of pre-tax dollars that are contributions to your Death and Disability cover do not form part of your assessable income and therefore as the contributions are not incurred in gaining or producing your assessable income no deduction is allowable.

Whilst it is acknowledged that the contributions are compulsory this does not convert an expense to an allowable deduction.

It should be noted that even if the compulsory contributions were paid in after tax dollars the contributions would be considered to be capital expenses which would not be deductible under section 8-1 of the ITAA 1997.