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Ruling

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

Question

Where a death benefit payment has been paid to a member in a previous tax year, can the fund make a further death benefit payment and claim a deduction under section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

2012-13 income year

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The Trustee is the trustee of a superannuation fund (the Scheme).

The Scheme is a complying superannuation fund under section 45 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

The Scheme is a defined benefit Scheme with a large number of members.

The Scheme was formed several years ago.

The Scheme's lump sum retirement benefit is a multiple of the member's final average salary, subject to a maximum.

The formula takes into account the reduction of benefit entitlements resulting from the contributions tax levied on the Fund.

The Trustee has received advice from the Scheme's consulting actuary, who has concluded that given the reduction in benefit entitlements in response to the taxing of contributions, it is appropriate that defined benefit death benefits paid in respect of deceased members be augmented to compensate for the reduction in the benefits.

The Trustee has identified several death benefits paid to eligible dependants upon which a 'tax saving amount' should have been paid. The 'tax saving amount' was not included in the original death benefits that were paid, as the trustees were not aware that they were eligible to provide an anti-detriment benefit.

The Scheme's actuary has used the relevant formula set out in ATO Interpretative Decision ATO ID 2007/219 to determine the augmentation to be passed on to the dependants of the deceased members. The Scheme proposes to pay the eligible dependants of the deceased members the 'tax saving amounts' during the 2012-13 income year.

The Scheme will fund the 'tax saving amount' from the Scheme's defined benefit pool cash flows.

The Scheme intends to claim the deduction for the 'tax saving amounts' in the 2012-13 income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 279D

Income Tax Assessment Act 1997 Section 295-485

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

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.21(2)

Reasons for decision

Summary of decision

The Scheme cannot claim a deduction under section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997) for a further death benefit made to a member because the associated death benefit payment did not include the tax saving amount.

Detailed reasoning

Prior to 30 June 1988, the income of a superannuation fund was not subject to tax. Benefits payable from a superannuation fund were taxed at 30%. On the introduction of the 15% tax on income of the superannuation fund, the 30% tax rate on benefits was reduced to 15%.

Prior to 30 June 1988, lump sum benefits payable to a dependant on the death of the member were not subject to tax. The anti-detriment provisions under section 279D of the Income Tax Assessment Act 1936 (ITAA 1936) provides a deduction to offset the impact of the introduction of tax on the payment of a death benefit to a dependant.

The provisions in section 279D of the ITAA 1936 were repealed and replaced with section 295-485 of Income Tax Assessment Act 1997 (ITAA 1997) with operation from 1 July 2007. The intention of the original legislation in section 279D of the ITAA 1936 remains unchanged.

A fund can claim a deduction 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. The 'tax saving amount' is the amount that the fund could have paid the eligible dependant of a member if assessable contributions in respect of a member had not been included in the assessable income of the fund.

Section 295-485 of the ITAA 1997 states:

(1) An entity that is a complying superannuation fund, or a complying approved deposit fund, and has been since 1 July 1988 (or since it came into existence if that was later) can deduct an amount under this section if:

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 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.

(2) The fund can deduct the amount in the income year in which the lump sum is paid.

All the conditions under section 295-485(1) of the ITAA 1997 must be met before a fund can claim a deduction under section 295-485 of the ITAA 1997.

We will now discuss each condition.

Complying superannuation fund

The Scheme is a complying superannuation fund so this condition has been met.

A superannuation lump sum is paid because of the death of a person

Under paragraph 295-485(1)(a) of the ITAA 1997 a fund 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.

In this case the Trustee has identified death benefits paid to dependants since the Scheme was formed upon which a 'tax saving amount' should have been paid. The 'tax saving amount was not included in the original death benefits that were paid, as the trustees were not aware that they were eligible to provide an anti-detriment benefit. The original benefits were paid to those dependants during the 2009-10 and 2010-11 income years.

The Scheme proposes to pay the dependants of the deceased members a further death benefit payment comprising the 'tax saving amounts' during the 2012-13 income year.

The condition under subsection 295-485(1)(a) of the ITAA 1997 is satisfied as a superannuation lump sum is paid because of the death of a person to a dependant of the deceased member.

The lump sum is increased by an amount (the tax savings amount)

Under paragraph 295-485(1)(b) of the ITAA 1997 the fund increases the amount of 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.

There is no restriction that allows only one lump sum death benefit to be paid to a dependant of a deceased member.

Under sub regulation 6.21(2)(a) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) benefits that are paid due to the death of a member can be cashed as either:

(i) a single lump sum; or

(ii) an interim lump sum (not exceeding the amount of the benefits ascertained at the date of the event mentioned in subregulation (1)) and a final lump sum (not exceeding the balance of the benefits as finally ascertained in relation to the event);

While a fund can, therefore, pay a death benefit in two lump sums, in order for a fund to meet the condition under paragraph 295-485(1)(b) of the ITAA 1997 each lump sum paid must include the tax saving amount.

In this case the Scheme has made a lump sum death benefit to dependants in previous income years. The death benefits paid during that period did not include any tax savings amount. The Scheme proposes to pay the dependants of the deceased members the tax saving amounts during the 2012-13 income year. The Scheme intends to claim the deduction for the tax saving amounts in the 2012-13 income year.

As the original lump sums paid to the dependants of the deceased members during the 2009-10 and 2010-11 income years comprised the members' full entitlement in the fund and did not include a tax saving amount, the condition under 295-485(1)(b) of the ITAA 1997 has not been met.

The 'tax savings amount' can only form part of a payment, i.e. increasing a benefit otherwise payable, not comprise the whole payment in its own right. In this case, there is no unpaid benefit to be increased as the deceased members' full entitlements have already been paid out.

Conclusion

As mentioned above, all the conditions under section 295-485 of the ITAA 1997 have to be satisfied before the fund can claim a deduction under that section. In this case as one of the conditions in section 295-485 of the ITAA 1997 have not been met the Fund cannot claim a deduction for the proposed payment that will be made to the dependants of the deceased members in the 2012-13 income year.

The Scheme is not entitled to a deduction under section 295-485 of the ITAA 1997 for the proposed payment to be made to dependants of the deceased members in the 2012-13 income year as the tax savings amount was not included in the original payment made to the dependants.

Further issues for you to consider

Under subregulation 6.21(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) a member's benefits in a regulated superannuation fund must be cashed 'as soon as practicable' after the member dies. It is noted that a few years have passed from the death of the members to the date of the proposed payments to the member's dependants while, in contrast, the original payments were made between less than a year after the members' death.