Edited version of private advice

Authorisation Number: 1051635575419

Date of advice: 19 February 2020

Ruling

Subject: Deductions for insurance premiums

Question 1

Is the benefit that was paid to the Fund by the Insurer in the 2019-20 income year in respect of an insurance policy held by the Fund's member, a benefit for which deductions are available under section 295-460 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, the benefit paid to the Fund by Insurer is a benefit for which deductions are available under section 295-460 of the ITAA 1997.

Question 2

Can the Trustee of the Fund make a choice under subsection 295-465(4) of the ITAA 1997 to claim a deduction under section 295-470 of the ITAA 1997 in respect of its future liability to pay death benefit in the 2019-20 income year?

Answer

Yes, please refer to our 'Reasons for decision'.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Fund is a complying self-managed superannuation fund (SMSF).

The Fund had originally two members, Member 1 and Member 2,

Member 1 passed away on in the 20XX-XX income year.

In the application for private binding ruling you advised us that:

·         Member 1 was employed on a full time basis by a non-related entity.

·         Member 1 commenced the employment with the employer sometimes in 19XX and continued this employment until the last date before their death in the 20XX-XX income year.

·         Member 1 was diagnosed with terminal cancer in the 20XX-XX income year.

·         The Fund held a Life and Total and Permanent Disablement (TPD) insurance for Member 1 with the Insurer for a specified amount.

·         This insurance policy was taken out by the Fund for Member 1 sometimes in the 20XX-XX income year.

·         The Fund claimed deductions for insurance premiums paid on this insurance policy in the 20XX-XX and preceding income years

·         The payout for the insured amount was received by the Fund sometime in the 20XX-XX income year.

·         In the 20XX-XX income year the Fund paid monthly insurance premiums. These insurance premiums were deducted from the member's accumulation account.

·         The Fund is yet to pay the Member 1's death benefit that is expected to be paid to Member 1's spouse.

·         The trustee wishes to make election under subsection 295-465(4) of the ITAA 1997 in respect of the 20XX-XX income year to claim deduction under section 295-470 of the ITAA 1997.

·         The Fund will not claim deduction in respect of the premiums under section 295-465 of the ITAA 1997.

·         The Fund has not yet finalised accounts and SMSF annual return for the 20XX-XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-460

Income Tax Assessment Act 1997 Paragraph 295-460(aa)

Income Tax Assessment Act 1997 Section 295-465

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

Income Tax Assessment Act 1997 Section 295-470

Income Tax Assessment Act 1997 Subsection 295-470(1)

Income Tax Assessment Act 1997 Subsection 295-470(2)

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 307-5

Reasons for decision

Summary

The death benefit that was paid to the Fund in respect of its Member 1, is a benefit listed in section 295-460 of the Income Tax Assessment Act 1997 (ITAA 1997) for which deductions for insurance premiums are available.

As you advised us that the Trustee of the Fund will make a valid choice under subsection 295-465(4) of the ITAA 1997 to deduct amount in relation to this benefit under subsection 295-470 of the ITAA 1997, and that this benefit meets requirements of this provision, the Trustee will be able to claim deduction for an amount calculated in accordance with formula listed under subsection 295-470(2) of the ITAA 1997 in the 20XX-XX income year.

Detailed reasoning

The legislation that governs the deductibility of an insurance premium paid by a complying self-managed superannuation fund (SMSF) on behalf of its member/s is contained in sections 295-460; 295-465 and 295-470 of the ITAA 1997. For any insurance premiums paid by an SMSF to be deductible pursuant to sections 295-465 or 295-470 of the ITAA 1997, the premiums must be wholly or partly for current or future liabilities of the Fund to provide a benefit specified under section 295-460 of the ITAA 1997.

Section 295-460 of the ITAA 1997 states that deductions for insurance premiums are available to complying SMSFs for the following benefits:

(a)  a superannuation death benefit;

(aa) a benefit consisting of an amount payable to an individual because of a terminal medical condition exists in relation to the individual;

(b)  ...

Section 995-1 of the ITAA 1997 states that a superannuation death benefit has the meaning given by section 307-5 of the ITAA 1997. Item 1 of subsection 307-5(1) of the ITAA 1997 defines the superannuation death benefit in Column 3 as:

A payment to you from a superannuation fund, after another person's death, because the other person was a fund member

You advised us that after Member 1's death in the 20XX-XX income year the Insurer, paid a specified amount in the 20XX-XX income year for life cover held by Member 1. You further stated that it is expected that this benefit will be paid to Member 1's spouse in the 20XX-XX income year as a death benefit.

Based on this information we are satisfied that the benefit you are seeking this ruling for will meet the requirements of a death benefit.

You further advised us that you wish to make election under subsection 295-465(4) of the ITAA 1997 to claim deduction under section 295-470 of the ITAA 1997.

As stated in ATO Interpretative Decision ATO ID 2015/17 section 295-465 of the ITAA does not prescribe time limits within which a trustee must make a choice to claim a deduction under section 295-470 of the IAAA 1997. There is no express stipulation that the choice under subsection 295-465(4) of the ITAA 1997 must be made prior to a member's death.

The ATO ID 2015/17 however states that:

The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Bill 2006 that introduced Division 295 of the ITAA 1997 indicated that there was no intention to alter the operation of the law under Part IX of the ITAA 1936 except to extend the choice to deduct an amount for the self-employed.

In the absence of any express provision in the law or clear legislative intention to the contrary, an interpretation of the law reflects the policy under the ITAA 1936 is preferred.

Based on the repelled subsection 279(6) of the ITAA 1936, it would generally be expected that the trustee of the superannuation fund would make a choice under subsection 295-465(4) of the ITAA 1997 on or before the time the fund lodges its income tax return for the relevant year to which the choice relates (or before such later date as the Commissioner allows for lodgement of the fund's return).

As previously mentioned, based on the provided information we are satisfied that the benefit that was paid to the Fund by the Insurer, after the death of Member 1 is a benefit for which a deduction of insurance premiums is available under paragraph 295-460(a) of the ITAA 1997.

You advised that you wish to make valid election under subsection 295-465(4) of the ITAA 1997 to claim deduction under section 295-470 of the ITAA 1997.

Section 295-470 of the ITAA 1997 states that a complying superannuation fund can deduct amount under this section for an income year if:

(a)  the trustee of the funds make a choice under subsection 295-465(4) and the choice applies to the income year; and

(b)  the trustee pays:

(i)       a benefit referred to in paragraph 295-460(a); (aa) or (b) for the income year in consequence of the termination of a member's employment; or

(ii)      a benefit referred to in paragraph 295-460(c).

As you advised us that you will make a valid choice under section 295-465(4) of the ITAA 1997 and the benefit is a benefit referred to in paragraph 295-460(a) of the ITAA 1997, the Trustee of the Fund will be able to deduct an amount calculated in accordance with formula listed under subsection 295-470(2) of the ITAA 1997 in the 20XX-XX income year.