Edited version of private ruling

Authorisation Number: 1011896361480

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Ruling

Subject: Deduction for future liability to pay death or disability benefits

Question 1

Can the trustee of your superannuation fund (the Fund) make a choice under subsection 295-465(4) of the Income Tax Assessment Act 1997 (ITAA 1997) not to claim a deduction for insurance premiums?

Answer:

No.

Question 2

If the trustee cannot make a choice under subsection 295-465(4) of the ITAA 1997, is the trustee entitled to claim a deduction under section 295-470?

Answer:

No.

This ruling applies for the following period:

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

A member (the member) of your superannuation fund (the Fund) has for a number of years been a member of industry superannuation funds.

During the 2010-11 income year the member ceased work due to permanent incapacity as a result of deteriorating health.

The industry superannuation funds, which pay insurance premiums, subsequently received claims from the member for insurance benefits.

One of the industry funds subsequently paid insurance benefits to the member, which were added to the member's account balance in the industry fund.

Shortly after the insurance benefits were paid the member ceased membership of the industry fund and the member's total account balance in that fund was rolled over to the Fund.

The Fund is a self managed superannuation fund (SMSF) and the member is the only member who is not gainfully employed.

The Fund:

(i) has no insurance policies for death or disability benefits;

(ii) is not self insuring; and

(iii) does not have any actuary certificate specifying any amount the Fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide disability benefits.

In the 2011-12 income year the member commenced receiving a superannuation income stream from the Fund.

The member is over 55 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-460.

Income Tax Assessment Act 1997 Section 295-465.

Income Tax Assessment Act 1997 Subsection 295-465(1).

Income Tax Assessment Act 1997 Subsection 295-465(2).

Income Tax Assessment Act 1997 Subsection 295-465(2A).

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

Income Tax Assessment Act 1997 Section 295-470.

Reasons for decision

These reasons for decision accompany the Notice of private ruling .

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Summary

The trustee of the Fund is not entitled to claim a deduction for its future liability to pay benefits. A prerequisite for claiming such a deduction is that the trustee has made a choice not to claim a deduction for:

(a) premiums paid by the Fund in relation to an insurance policy, or

(b) if the Fund is self insuring, the amount that an actuary certifies the fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy.

As the Fund did not pay premiums for an insurance policy or satisfy being self insured, it does not have an entitlement to claim a deduction for insurance which would provide benefits in relation to death, a terminal medical condition or disability.

Accordingly, it follows that as no choice exists the Fund is not entitled to claim a deduction in relation to its future liability to pay benefits.

Detailed reasoning

A complying superannuation fund (a fund) that provides benefits in relation to death, a terminal medical condition or disability, as detailed in section 295-460 of Income Tax Assessment Act 1997 (ITAA 1997), may claim a deduction under section 295-465 for a portion of the premiums that are paid for an insurance policy which covers these benefits.

Alternatively, if the trustee of a fund is entitled to a deduction under section 295-465 of the ITAA 1997, and makes a choice under subsection 295-465(4) not to claim the deduction, the trustee can claim a deduction under section 295-470 for future liability to the pay benefits in relation to death, a terminal medical condition or disability (the benefits).

Thus, in order to determine whether a fund can claim a deduction under section 295-470 of the ITAA 1997 consideration must first be given as to whether the fund is entitled to a deduction under section 295-465.

Deductions for insurance premiums

Subsection 295-465(1) of the ITAA 1997 states:

A complying superannuation fund can deduct the proportions specified in this table of premiums it pays for insurance policies that are (wholly or partly) for current or contingent liabilities of the fund to provide benefits referred to in section 295-460 for its members. It can deduct the amounts for the income years in which the premiums are paid. (emphasis added)

In relation to the table in subsection 295-465(1), various types of insurance policies are listed, and the proportions of those policies, on which premiums are paid may be claimed as a deduction.

The effect of subsection 295-465(1) of the ITAA 1997 is that the superannuation fund which pays the premium for current or contingent liabilities of the fund (that is, liabilities relating to death, a terminal medical condition or disability) is entitled to claim a deduction.

In your case the Fund did not pay any premiums in relation to an insurance policy which covers the types of benefits stated in section 295-460 as the Fund did not have any insurance policy for those types of benefits.

It is noted that when the member's total balance in the industry fund was rolled over into the Fund it included disability benefits. These benefits, however, resulted from a claim made by the member with the industry fund, and the benefits arose from an insurance policy on which the premiums were paid by the industry fund.

In view of the above it is evident that no premiums were paid by the Fund and accordingly it cannot claim a deduction under subsection 295-465(1) of the ITAA 1997.

Notwithstanding the above, deductions may be allowed where a complying superannuation fund is self-insured.

Deductions for self-insurance

Subsection 295-465(2) of the ITAA 1997 states:

A complying superannuation fund can also deduct the amount it could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide benefits referred to in section 295-460 for which it does not have insurance coverage. It can deduct the amount for the income year when it has the liability.

Further, subsection 295-465(2A) of the ITAA 1997 states:

For the purposes of subsection (2), the regulations may provide that a specified proportion of an amount mentioned in subsection (2B) may be treated as being the amount the fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for its current or contingent liabilities to provide benefits referred to in section 295-460.

Example:

If:

(a) an actuary certifies the amount a fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy; and

(b) the insurance policy covers liabilities of the fund to provide a class of total and permanent disability benefits broader than that covered by section 295-460; and

(c) the insurance policy is specified in the regulations; and

(d) the fund does not have insurance coverage for the liabilities;

the fund may deduct, under subsection (2), so much of that certified amount as is specified in the regulations.

The above subsections show that a deduction is available to a complying superannuation fund if it is certified by an actuary that, amongst other matters, the fund has:

· specified amounts which are payable in addition to the member account balances;

· death or disability benefits which are in no part provided by external insurance; and

· a segregated insurance reserve that is as large as the actuary has certified.

In your case subsections 295-465(2) and 295-465(2A) of the ITAA 1997 are not satisfied as:

(a) you stated the Fund is not self-insured; and

(b) there is no actuary certificate specifying any amount the Fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide disability benefits.

As the Fund did not pay premiums for an insurance policy or satisfy being self-insured, a deduction cannot be claimed under section 295-465 of the ITAA 1997.

In addition to the above it should also be noted that subsection 295-465(4) of the ITAA 1997 states:

The trustee may choose not to deduct amounts under this section for an income year and to deduct instead (under section 295-470) amounts based on the fund's future liability to pay the benefits.

The effect of subsection 295-465(4) of the ITAA 1997 is that a fund is required to choose between two options to claim a deduction, that is:

· claim a deduction for insurance premiums in the income year in which they are paid (section 295-465); or

· claim a deduction for it's future liability to pay benefits (section 295-470).

Further, subsection 295-465(4) of the ITAA 1997 indicates that a fund must already have an entitlement to claim a deduction, for example under subsection 295-65(2), before it can be entitled to a deduction under section 295-470.

In your case, as the Fund does not have an entitlement to claim a deduction under section 295-465 of the ITAA 1997, it follows that the ability to make a choice under subsection 295-465(4) is not available.

Deductions for future liability to pay benefits

Section 295-470 of the ITAA 1997 states, amongst other matters, that a complying superannuation fund can deduct an amount for a future liability to pay benefits if:

(a) the trustee of the fund makes a choice under subsection 295-465(4) of the I TAA 1997 and the choice applies to the income year; and

(b) the trustee pays benefits referred to in section 295-460 of the ITAA 1997.

In view of the above, the first condition that must be satisfied to claim a deduction under section 295-470 of the ITAA 1997 is that the fund must be able to make a choice under subsection 295-465(4).

In this case as the Fund failed to satisfy subsection 295-465(4) of the ITAA 1997, as discussed earlier, it follows that the Fund is precluded from claiming a deduction for future liability to pay benefits under section 295-470.

Conclusion

For a complying superannuation fund to claim deductions for future liability to pay benefits (these being for death, a terminal medical condition or disability) all the conditions under section 295-470 of the ITAA 1997 must be satisfied.

One of the conditions is the trustee of a fund makes a choice under subsection 295-465(4) of the ITAA 1997, that is, if the trustee of the fund has an entitlement under section 295-465 it foregoes that entitlement in favour of claiming a deduction under section 295-470.

In this case the Fund is not entitled to claim a deduction under section 295-465 of the ITAA 1997. Therefore as the Fund is not entitled to a deduction under section 295-465 it cannot make a choice under subsection 295-465(4). Thus as subsection 295-465(4) is not satisfied the Fund is precluded from claiming a deduction under section 295-470.