Edited version of your written advice

Authorisation Number: 1012695230090

Ruling

Subject: Deduction for future liability to pay benefits

Question 1

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

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2011

Relevant facts and circumstances

The Fund is a self managed superannuation fund.

The trustee of the Fund is a corporate trustee.

The initial members of the Fund were:

• Member 1 (the Deceased); and

• Member 2

The Deceased passed away in the 2012 income year.

The Deceased was under 40 years old at the date of death.

The trustee of the Fund effected and owned two life insurance policies. One policy was in respect of the Deceased and the second policy was in respect of Member 2.

In the 2011 income year a premium was paid in respect of the life insurance policy for the Deceased and claimed as a deduction by the Fund in the 2010-2011 income year.

A premium was not paid in respect of the life insurance policy for the Deceased by the Fund in the 2011-12 or 2012-13 income years, as the Deceased passed away before the payment of annual premiums were due.

Premiums were paid in respect of the life insurance policy for Member 2 in the 2012 and 2013 income years.

The Deceased's life insurance policy is only payable on death, terminal illness and total and permanent disability.

In the 2012 income year, as a result of the Deceased's death, the Fund received a life insurance payment of $X which became payable to their dependent, Member 2.

In the 2013 income year a superannuation lump sum death benefit of $Y was paid to Member 2. The balance of the death benefit is being paid out in the form of a pension.

In your private ruling application you advised:

The Fund wishes to make an election under section 295-465(4) of the Act in respect of the 2012/13 year to claim a deduction under section 295-470. It will not claim any deduction in respect of premiums under section 295-465.

In further correspondence you advised that:

The accountant evidenced the election in the 2012 tax return by not claiming a tax deduction for the life insurance premiums paid in that year.

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 cannot make an election to claim a deduction for its future liability to pay benefits in respect of the Deceased as no insurance premiums have been paid in respect of the Deceased's policy for the 2012 and 2013 income years.

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.

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 2.

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 the Deceased for the income year ending 30 June 2011 and a deduction accordingly claimed by the Fund in the 2011 income year. However, the Fund did not pay any insurance premiums in respect of the Deceased's policy for the income years ending 30 June 2012 and 2013.

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 2011-12 income year, or the 2012-13 income year, the Fund can only claim a deduction under subsection 295-465(1) of the ITAA 1997 in respect of the insurance premiums paid for Member 2 in the 2012 and 2013 income years.

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 as no insurance premiums were paid in respect of the Deceased's policy in the 2012 or 2013 income years. 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 2 for the years ending 30 June 2012 and 2013, 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 2012 and 2013 income years and to deduct instead amounts based on the Fund's future liability to pay benefits in respect of Member 2. However, that deduction would only occur when the Fund incurs an actual cost for providing the benefit.