Question 1

Is the Trustee of the Fund able to make a choice under subsection 295-465(4) of the Income Tax Assessment Act 1997 (ITAA 1997), for the 2022-23 financial year, not to deduct under section 295-465 and to deduct amounts instead under section 295-470, based on the fund's future liability to pay the benefits?

Answer 1

Yes

Question 2

If the Fund Trustee makes a choice to claim a deduction under section 295-470 of ITAA 1997 and the Commissioner disallows the deduction, will the Commissioner decide that a deduction for premiums can be claimed in the 2022-23 and future financial years under ITAA 1997 section 295-465?

Answer 2

Yes

This private ruling applies for the following periods:

1 July 2019 to 30 June 2025

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

The Fund is a self-managed superannuation fund.

The Member ceased employment due to becoming permanently incapacitated.

Medical certifications - ATO form titled Individual retired due to permanent disability or terminal medical condition - supporting documentation - certifications were provided by two medical practitioners with the start date of retirement due to permanent disability being in the 2019-20 financial year.

A policy of insurance for total and permanent disablement and term life cover for the Member was held by the Fund Trustee and was in force during the 2022-23 financial year, and during the 2022-23 financial year insurance premiums were paid by the Fund in respect of the Member.

In accordance with the 'Total and Permanent Disablement' policy an insurance benefit was paid to the Fund in the 2022-23 financial year.

The Member received a disability superannuation benefit when the Member rolled superannuation benefits to an APRA regulated superannuation fund.

You advised that the Fund's annual return for the 2022-23 financial year will not be lodged until a decision has been made in respect of this private ruling request.

Relevant legislative provisions and ATO view

Income Tax Assessment Act 1997 section 295-320

Income Tax Assessment Act 1997 section 295-460

Income Tax Assessment Act 1997 section 295-465

Income Tax Assessment Act 1997 section 295-470

Income Tax Assessment Act 1997 section 306-5

Income Tax Assessment Act 1997 section 306-10

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 section 307-15

Income Tax Assessment Act 1997 section 307-65

Income Tax Assessment (1997 Act) Regulations 2021 Regulation 295.465.01

ATO Interpretative Decision ATO ID 2015/17 Income tax: complying superannuation fund: deduction for future liability to pay death benefits -Income Tax Assessment Act 1997 section 295-470

Reasons for decision

Question 1

Summary

As the Fund had a future liability to pay TPD benefits in the 2022-23 financial year, an election pursuant to subsection 295-465(4) being made prior to the lodgment of the 2022-23 SAR, entitles the Fund to claim a deduction under section 295-470 in relation to TPD benefits paid out in respect of the Member in the 2022-23 financial year.

Detailed reasoning

Legislative references are to the Income Tax Assessment Act 1997 unless otherwise stated.

Question 1

Subsection 295-465(1) 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 section 295-460 for its members. It can deduct the amounts for the income year in which the premiums are paid.

In this case, premiums were paid by the Fund during the 2022-23 financial year.

A prerequisite for claiming a deduction under subsection 295-465(1) is that the premiums for relevant insurance policies are paid. As these premiums were paid in the 2022-23 financial year, the Fund Trustee can claim a deduction for that year.

With reference to item 6 of the table at subsection 295-465(1), subsection 295-465(1B) states that the regulations may provide that a specified proportion of an insurance policy be treated as being attributable to the liability to provide benefits per section 295-460.

Regulation 295.465.01 of the Income Tax Assessment (1997 Act) Regulations 2021, provides that 100% of the premiums for 'TPD any occupation' policies are deductible, whether or not they have specific inclusions.

Under subsection 295-465(4), a trustee may choose not to deduct amounts under section 295-465 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) provides that this choice applies also to future income years unless the Commissioner decides that it should not.

Subsection 295-470(1) provides that a complying fund can deduct an amount under that subsection if the trustee has made a choice under subsection 295-465(4), the choice applies to the income year and the trustee pays a benefit of the kind described in section 295-460.

Relevantly, section 295-460 provides that sections 295-465 and 295-470 apply to a disability superannuation benefit.

Subsection 295-470(2) details how to calculate the amount a fund can deduct under the section.

The effect of subsections 295-465(4) and (5) is that once a fund makes an election under subsection 295-465(4), they must claim deductions in accordance with section 295-470 and cannot revert to claiming deductions under subsection 295-465(1), unless the Commissioner decides otherwise. There is, however, nothing to prevent a fund from making an election under subsection 295-465(4) to claim deductions under section 295-470 instead of subsection 295-465(1), provided all the requirements of subsection 295-465(4) are met.

Future liability to pay benefits

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

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.

However, in the legislative context in which this provision is found, a different definition is clear. That is, the wording of section 295-470, specifically paragraph 295-470(1)(b), states that the fund not only has to have made a choice to deduct under this provision, but they must have also paid the specified benefit.

Additionally, ATO ID 2015/17 - Income Tax - Income Tax: complying superannuation fund: deduction for the future liability to pay death benefits - section 295-470 of the Income Tax Assessment Act 1997, (ATO ID 2015/17) provides that no time limit in which a choice must be made is prescribed by section 295-465 and as such, there is no express stipulation that the choice under subsection 295-465(4) must be made prior to the benefit payment event.

Further, ATO ID 2015/17 also states that:

Based on repealed 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 lodgment of the fund's return).

In this case, the Fund held 'Any occupation TPD Cover' with inclusions for loss of limb, daily activities, and cognitive loss, which is consistent with item 2 in the table at subsection 295-465.01 of the Income Tax Assessment (1997 Act) Regulations 2021.

A legally qualified medical practitioner certified that the Member was to retire due to permanent disability. Another legally qualified medical practitioner provided a similar certification. The start date for the member's retirement due to permanent disability was in 2019. Effectively, in the 2022-23 financial year, the Fund trustee was able to make a decision that the Member was suffering 'permanent incapacity' and as such was able to meet Item 103 - Permanent incapacity - Column 1 SISR Schedule - conditions of release of benefits, with a nil cashing restriction.

Under clause 9.8 of the Fund trust deed, the Fund Trustee was provisionally obligated to pay a benefit on or after the 2019, unless requested otherwise by the Member. That provisional obligation crystallised in 2023.

Policy proceeds and rollover transaction

In 2022, TPD insurance proceeds were received by the Fund and together with other accumulation amounts, benefits were rolled over to an APRA regulated fund on 30 June 2023.

Section 307-5 defines a 'superannuation benefit' and relevantly includes a payment to an individual from a superannuation fund, because of their membership of that fund.

A payment from a superannuation fund at a member's request to another superannuation fund is a superannuation benefit for the member because, under the constructive receipt rule in section 307-15, the member is treated as having received the payment, although it is actually made to another superannuation fund. The superannuation benefit is taxed as a roll-over superannuation benefit, and being a disability superannuation benefit, section 307-145 of the ITAA 1997 applies to modify the tax-free component.

Section 995-1 defines a 'disability superannuation benefit' as a superannuation benefit which is paid to an individual because of ill-health (whether physical or mental), and 2 legally qualified medical practitioners have certified that, because of the ill-health, it is unlikely that the individual can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

In summary, TPD cover which aligned with income tax regulations was held by the Fund, a claim was made under the policy, proceeds were received by the Fund, and the TPD proceeds and additional accumulation amounts were paid to the Member by way of a rollover transaction on 30 June 2023.

Choice not to deduct amounts under section 295-465

The question arises as to whether a future liability to pay a benefit arose within the meaning of subsection 295-465(4). As detailed above, the range of transactions associated with the TPD payment all occurred in the 2022-23 financial year.

In a financial reporting context, the Fund trustee was able to recognise and record a future TPD liability in the 2022-23 financial year, in accordance with the standards for recognition of a liability under the accounting concepts as published by the Australian Accounting Standards Board.

In a legal context, clause 9.8 of the Fund trust deed serves to place a legal requirement on the Fund Trustee to pay a future TPD benefit, unless requested otherwise by the Member.

As stated in ATO ID 2015/17:

Section 295-465 of the ITAA 1997 does not prescribe time limits within which a trustee must make a choice to claim a deduction under section 295-470 of the ITAA 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.

(emphasis added)

Likewise, there is no express stipulation that the choice under subsection 295-465(4) must be made prior to an event, in the form of the Fund Trustee deciding that the Member was suffering 'permanent incapacity'.

Furthermore, ATO ID 2015/17 states:

Based on repealed 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 lodgment of the fund's return).

You have advised that the Fund has applied for an extension to lodge the Fund's 2022-23 annual return (2022-23 SAR) pending the outcome of this private ruling.

Accordingly, the Fund Trustee is entitled to make a choice under subsection 295-465(4) to claim a deduction calculated in accordance with section 295-470, in relation to benefits paid out in respect of the Member for the 2022-23 financial year.

Conclusion

As the Fund had a future liability to pay TPD benefits in the 2022-23 financial year, an election pursuant to subsection 295-465(4) being made prior to the lodgment of the 2022-23 SAR, entitles the Fund to claim a deduction under section 295-470 in relation to TPD benefits paid out in respect of the Member in the 2022-23 financial year.

Question 2

Summary

If the Fund makes a choice to claim a deduction under section 295-470 and the Commissioner disallows the deduction, the Commissioner will allow a deduction for premiums to be claimed in the 2022-23 and future financial years under section 295-465, provided that certain conditions are met.

Detailed reasoning

Subsection 295-465(5) provides that a choice made under subsection 295-465(4) applies to future income years, unless the Commissioner decides that it should not.

Additionally, the notes to section 295-460 provide that the fund can only deduct amounts in relation to these benefits under either section 295-465 or 295-470, not both.

Subject to meeting their legislated conditions, sections 295-465 and 295-470 are alternatives - that is, you can either claim under one, or the other.

As such, should the Commissioner disallow the claim under section 295-470, the fund still retains the right to the alternative claim under section 295-465 instead.