Edited version of private advice

Authorisation Number: 1012624952872

Ruling

Subject: Deduction for future liability to pay benefits

Question

Is the superannuation fund entitled to claim deduction under section 295-470 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of its future liability to pay benefits for the deceased member?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The superannuation fund (the Fund) is a self managed superannuation fund.

The trustee of the Fund is a corporate trustee.

The members of the Fund are:

_ Member 1; and

_ Member 2 (the Deceased).

The Deceased passed away in the relevant income year.

The Deceased was more than 55 years old at the date of death.

The trustee of the Fund effected and owned two life insurance policies with an Australian life insurer. One was in respect of the Deceased and the second was in respect of Member 1. Both policies commenced in the 2009-10 income year.

The premiums paid in respect of the life insurance policy for the Deceased have been claimed as a deduction by the Fund since the policy's inception. Details of the premiums paid for the last two years up to the date of death, have been provided.

The premiums paid in respect of the life insurance policy for Member 1 have been claimed as a deduction by the Fund since the policy's inception. Details of the premiums paid for the last three years, have been provided.

Both life insurance policies are only payable on death and do not include any bonuses or death and disability components.

As a result of the Deceased's death, the Fund received a life insurance payment which, together with the Deceased's accumulated Fund balance, became payable to the Deceased's dependent, Member 1.

A superannuation lump sum death benefit was paid to Member 1 in the year ending 30 June 2014.

A choice under subsection 295-465(4) of the Income Tax Assessment Act 1997 has, as yet, not been made by the trustee of the Fund.

The applicant advised that an election is to be made in the year of the payment of the Deceased's death benefits by the Fund, that being the year ended 30 June 2014 and subject to the determination of the Private Ruling request.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-460.

Income Tax Assessment Act 1997 Section 295-465.

Income Tax Assessment Act 1997 Section 295-470.

Superannuation Industry (Supervision) Act 1993 Section 62.

Reasons for decision

Summary

The Fund can only make an election to claim a deduction for its future liability to pay benefits in respect of the surviving member, Member 1.

The Fund cannot make an election to claim a deduction for its future liability to pay benefits in respect of the Deceased as:

(a) no insurance premiums have been paid in respect of the Deceased's policy for the 2013-14 income year: and

(b) the liability of the Fund to pay benefits in respect of the Deceased is no longer a future liability, but rather a current liability.

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

Detailed reasoning

Section 295-460 of the ITAA 1997 provides that section 295-465, which is about deductions for complying superannuation funds on insurance premiums they pay, and section 295-470, which is about deductions for complying superannuation funds on their future liability to pay benefits, apply to:

_ a superannuation death benefit;

_ a benefit payable to an individual with a terminal medical condition;

_ a disability superannuation benefit; or

_ a benefit consisting of an amount to a person under an income stream because of the person's temporary inability to engage in gainful employment and payable for no longer than two years or such longer period as approved:

(i) under section 62 of the Superannuation Industry (Supervision) Act 1993; or

(ii) by the Commissioner.

A fund can deduct amounts in relation to these benefits under either section 295-465 or section 295-470 of the ITAA 1997, but not both.

Subsection 295-465(1) of the ITAA 1997 provides that a complying superannuation fund can deduct the proportions specified in the table attached to the subsection, 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 subsection 295-460 for its members. It can deduct the amounts for the income year in which the premiums are paid.

In this case, a premium was paid by the Fund for the insurance policy held in respect of Member 1 for the income year ending 30 June 2014. However, the Fund did not pay any insurance premiums in respect of the Deceased's policy for the year ending 30 June 2014.

A prerequisite for claiming a deduction under subsection 295-465(1) of the ITAA 1997 is that the premiums for relevant insurance policies are paid. As no insurance premium was paid by the Fund in respect of the Deceased in the 2013-14 income year, the Fund can only claim a deduction under subsection 295-465(1) of the ITAA 1997 in respect of the insurance premium paid for Member 1 in the 2013-14 income year.

Under subsection 295-465(4) of the ITAA 1997, a 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 benefits.

Subsection 295-465(5) of the ITAA 1997 provides that this choice applies also to future income years unless the Commissioner decides that it should not.

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 under subsection 295-465(1); or

_ claim a deduction for its future liability to pay benefits under section 295-470.

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

In this case, the Fund does not have an entitlement to claim a deduction under subsection 295-465(1) of the ITAA 1997 in respect of any insurance premiums paid for the Deceased in the 2013-14 income year. It follows that the ability to make a choice under subsection 295-465(4) is therefore also not available in respect of the insurance policy held on the life of the Deceased.

As the Fund has paid insurance premiums for Member 1 for the year ending 30 June 2014, the Fund can claim a deduction under subsection 295-465(1) of the ITAA 1997. Alternatively, the Fund can choose to forego the deduction for these premiums in the 2013-14 income year and instead claim a deduction for its future liability to pay benefits in respect of Member 1.

It is important to note, that even if the Fund had paid insurance premiums in respect of the Deceased for the year ending 30 June 2014, the Fund would still not be entitled to claim a deduction for its future liability to pay benefits in respect of the Deceased.

Subsection 295-470(1) of the ITAA 1997 provides:

(a) that a complying fund can deduct an amount under that subsection if the trustee has made a choice under subsection 295-465(4);

(b) the choice applies to the income year; and

(c) the trustee pays a benefit of the kind described in section 295-460.

A key element of subsection 295-465(4) of the ITAA 1997 is that the amounts to be deducted under section 295-470 must relate to the fund's future liability to pay benefits.

The ITAA 1997 does not provide any guidance on what is meant by the phrase 'future liability to pay a benefit'. The word 'future' is defined by the Macquarie Dictionary as 'what will exist or happen in future time'. In light of this, it is possible to interpret the phrase in question as meaning a liability of the fund to pay a benefit which does not yet exist, but may come into existence on the happening of certain events in the future, for example, the death of a member of the fund.

In this case, the trustee of the Fund became obliged to pay a death benefit to the beneficiary at the time of the member's death. It was the occurrence of this event that caused the Fund's future liability to crystallise into a current liability. The Fund held a current liability to pay a benefit - an obligation which existed since the member's death. Even if an election was made under subsection 295-465(4) of the ITAA 1997 (which we note has not been made), it cannot be said that there was a future liability to pay a benefit within the meaning of subsection 295-465(4) at the time the election was made.

The trustee of the Fund cannot, after claiming deductions under section 295-465 of the ITAA 1997 for at least several years, switch to claim a deduction for a future liability to pay benefits under section 295-470 as if the deceased were still alive. The Fund does not hold a future liability to pay benefits in respect of the Deceased.

On the contrary, the trustee would be trying to make a retrospective election to claim a deduction for a liability that no longer constitutes a future liability of the Fund. As both subsection 295-465(4) and section 295-470 of the ITAA 1997 are premised on the basis of a future liability to pay benefits, it is not within the scope of these provisions for the trustee to make an election of this nature.

Therefore, the Fund is precluded from claiming a deduction for its future liability to pay benefits in respect of the Deceased. The Fund is, however, entitled to make an election under subsection 295-465(4) of the ITAA 1997 to deduct instead amounts based on the Fund's future liability to pay benefits in respect of Member 1. However, as noted earlier, that deduction would only occur when the Fund incurs an actual cost for providing the benefit.