Edited version of your written advice

Authorisation Number: 1012906544301

Date of advice: 6 November 2015

Ruling

Subject: Funeral plan

Question 1

Are you entitled to a deduction for the cost of a funeral plan?

Answer

No.

Question 2

Does the Superannuation Industry (Supervision) Act 1993 (SISA) prohibit a superannuation fund trustee from acquiring a prepaid funeral plan for a member?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts

A Fund purchased a pre-paid funeral plan.

The plan does not have an investment component and does not have a surrender value.

The plan is excluded from the operation of the Life Insurance Act 1995.

The prepaid funeral can only be utilized for the sole member of the Fund. The purpose of the plan is to pre-pay the member's funeral costs.

The member is a director of the Fund's corporate trustee.

The plan provides for the cost of funeral goods and services on the death of the member. The plan is not transferable to any other person.

The Fund is a trust and its deed is subject to the laws of the relevant state. Under the relevant state legislation the Trustee has power to insure against loss or damage, whether by fire or otherwise any insurable property and against any risk or liability against which it would be prudent for a person to insure if he were acting for himself.

Under Clause 10.1 of the Fund's Trust Deed the trustee may, in its absolute discretion, invest or apply the whole or any part of the fund in the payment of premiums of a policy of life … insurance in which the trustee has a legal or equitable interest.

Trust law and the Fund deed allows for life insurance on the member to be taken out by the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1.

Superannuation Industry (Supervision) Act 1993 section 62

Superannuation Industry (Supervision) Act 1993 section 65

Superannuation Industry (Supervision) Regulations 1994 regulation 4.07D

Reasons for decision

Allowable deductions

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.

Section 295-100 of the ITAA 1997 operates to allow a complying superannuation fund a tax deduction for expenses incurred in relation to acquiring, holding, or disposing of an investment consisting of life insurance policies issued by a life insurance company.

Subsection 995-1(1) of the ITAA 1997 states that a life insurance policy has the meaning given to the expression life policy in the Life Insurance Act 1995. (LIA)

Section 9 of the LIA defines a life policy as follows:

(1) Subject to subsection (2), each of the following constitutes a life policy for the purposes of this Act:

(a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life;

(b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life;

(c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life;

(d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph;

(e) a continuous disability policy;

(f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract;

(g) a contract (whether or not it is a contract of insurance) that constitutes an investment-linked contract.

(2) A contract that provides for the payment of money on the death of a person is not a life policy if:

(a) by the terms of the contract, the duration of the contract is to be not more than one year; and

(b) payment is only to be made in the event of:

(i) death by accident; or

(ii) death resulting from a specified sickness.

Under section 11(3)(e) of the LIA a life insurance business does not include:

(e) business in relation to a scheme or arrangement for the provision, by a person other than a life company, of benefits consisting of:

(i) the provision of funeral, burial or cremation services, with or without the supply of goods connected with such services; or

(ii) the payment of money, on the death of a person, for the purpose of meeting the whole or a part of the expenses of and incidental to the funeral, burial or cremation of the person;

and no other benefits, except benefits incidental to the scheme or arrangement.

As the pre-paid funeral plan is not regarded as a life insurance policy issued by a life insurance company, a deduction is not allowed under section 295-100 of the ITAA 1997.

A deduction is generally available for the cost of policy premiums if the taxpayer buys insurance against the loss of an income stream for which periodical payments received under the policy would constitute assessable income to the taxpayer (FC of T v. Smith 81 ATC 4114; 11 ATR 538).

If the receipts paid under a policy are capital in nature and not assessable income, the premiums are not an allowable deduction. For example, where a life insurance policy pays a tax free lump sum benefit on death or terminal illness, no deduction is allowed for the cost of the insurance premiums as the policy is capital in nature.

In this case, there is a pre-paid funeral plan. Such a policy is not an income protection policy and is not intended to compensate for the loss of earnings. Rather the policy provides money to pay for a member's funeral costs. The cost of the plan is not incurred in gaining or producing the Fund's assessable income. Furthermore, the expense is capital in nature and therefore not deductible under section 8-1 of the ITAA 1997.

Funeral plan

A pre-paid funeral is a funeral purchased in advance. The goods and services for the funeral are documented in a written contract and paid for at today's prices. Subject to any specific terms of the contract, the client will not have to pay any additional costs, regardless of when the funeral is required.

With funeral insurance, you are not pre-purchasing funeral costs but buying insurance to meet those costs at some future date. A decision is made on how much money will be needed to cover the funeral costs and the insurer is paid a monthly or annual premium. In the event of insured person's death, the nominated beneficiary receives the money for the purpose of paying for the funeral.

Subsequently, a pre-paid funeral plan is not a form of insurance, it is merely a purchase of goods and services to be used at some future date.

It should be noted that a self-managed superannuation fund (SMSF) may hold insurance policies for its members.

However, from 1 July 2014 subregulation 4.07D(2) of the Superannuation Industry (Supervision) Regulations 1994 provides that a trustee must not provide an insured benefit in relation to a member of the fund unless the insured event is consistent with the following conditions of release:

• death

• terminal medical conditions

• permanent incapacity, and

• temporary incapacity

Funeral insurance does not provide a benefit that would meet any of the above conditions of release, therefore, it cannot be held by an SMSF.

Financial assistance to a member

Under paragraph 65(1)(b) of the SISA a trustee of an SMSF is prohibited from giving any other financial assistance using the resources of the fund, to a member of the fund or to a relative of the member.

The assistance given must be financial in nature. Financial assistance extends beyond the provision of loans and beyond other kinds of character of money or property. Financial assistance can take the form of the giving of a guarantee, indemnity, security or charge or the taking on of an obligation, or any other arrangement that, on an objective assessment is in substance to provide financial assistance to a member or relative of a member using the resources of the SMSF.

Financial assistance using the resources of the SMSF is given if the arrangement relies on the assets of the SMSF, whether or not there is a positive, negative or nil effect on the net assets as a result of that arrangement.

A trustee is entitled to use the resources of the fund to pay for expenses it incurs in administering the day to day running of the fund. If in the present case the Fund has paid for the future funeral expenses of the member, then this would be considered a form of financial assistance to a member as stated at paragraph 117 of SMSFR 2008/1: giving financial assistance using the resources of a self-managed superannuation fund:

It is the Commissioner's view that the SMSF satisfying an obligation, or taking on an obligation, of a member or a relative of a member is the giving of financial assistance using the resources of the SMSF to the member or relative and therefore contravenes paragraph 65(1)(b).

As stated above, a pre-paid funeral plan is not a life insurance policy, it is merely a purchase of goods and services to be used by the member at some future date. The goods and services purchased under the Plan are for the future personal use of the member, or his family upon the member's death. Resources of the Fund have been used to pay for the cost of the Plan resulting in the provision of financial assistance to the member.

The purchase of a pre-paid funeral plan will result in a contravention of subsection 65(1)(b) of the SISA.

Sole purpose test

The sole purpose test prohibits trustees from maintaining an SMSF for purposes other than for the provision of benefits specified in subsection 62(1) of the SISA. The core purposes essentially relate to providing retirement or death benefits for, or in relation to, SMSF members. The SMSF can also maintain the fund for one or more of these purposes and other specified ancillary purposes, which relate to the provision of benefits on the cessation of a member's employment and other death benefits and approved benefits not specified under the core purposes.

The trustees hold the members' benefits in trust and make investment decisions that will generate income for the members' in retirement or to the members' beneficiaries on death. Trustees of an SMSF must adhere to the rules contained in the trust deed and meet their regulatory and administrative obligations. These rules exist to ensure a fund's assets are maximised and protected until they are required to pay a benefit after a condition of release has been met.

The sole purpose test is designed to ensure that the retirement income objective of SMSFs remains unqualified. A superannuation fund may use its resources to purchase investments or pay for expenses, including life insurance premiums, which are reasonably incidental to the provision of retirement benefits. However, the sole purpose test will not be met where a benefit is provided by the SMSF to a member or another party at a cost or financial detriment to the SMSF.

It is acknowledged that the purchase of a funeral plan is for the benefit of the member upon their death. However, the purchase is a current expense for goods and services that relate directly to the member and is essentially a form of financial assistance where an asset has been purchased for a member to be used by them at a later date. The cost of the Plan precludes the Fund from investing that money for the primary purpose of maximising retirement and death benefits for the member.

The Fund will contravene the sole purpose test where it purchases a pre-paid funeral plan for its member.