Private ruling: Deduction for increased amount of superannuation lump sum death benefit
Date of advice: 13 June 2018
Published: August 2018
Ruling period: Income year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Can the superannuation fund claim a deduction under section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of an increased amount of superannuation lump sum death benefit paid to a member’s spouse by way of recognising a future income tax benefit? | A1: No | Q2: Can the superannuation fund claim a deduction under section 295-485 of the ITAA 1997 in respect of an increased amount of superannuation lump sum death benefit paid to a member’s spouse, which is less than the calculated tax savings amount, if funded through a current year tax saving? | A2: No

Relevant facts and circumstances: The Fund is a complying self-managed super fund. There are two trustee members of the Fund. One trustee member passed away in mid-2017. The remaining member is 55 years of age. The trust deed of the Fund allows for anti-detriment payments. You have advised that the payment will be made prior to 30 June 2019. You propose that an anti-detriment payment will be paid through current year tax savings from a capital gain. You have advised that the capital gain will eventuate due to an in-specie property transfer. You propose that a residual amount will be paid through future income tax benefits. You believe this will be fully funded by the taxable income of the fund including concessional contributions made by the remaining member prior to reaching retirement age or ceasing to make any further concessional contributions.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-485

Reasons for decision: Detailed Reasoning - Proposal 1: You propose that an anti-detriment amount will be paid through a future tax benefit. You advise that the future income tax benefit is virtually certain against taxable income of the Fund inclusive of concessional contributions made by the remaining member. This means the Fund does not have sufficient assets to pay the amount proposed. Accordingly, the proposal does not give rise to a ‘tax savings amount’ and no deduction is available. | Detailed Reasoning - Proposal 2: You propose that an anti-detriment amount will be paid through current year tax savings due to a capital gain on an in-specie transfer of property. This means the Fund is not using cash flow, reserves or assets to fund the payment. Accordingly, no deduction is available. | Detailed Reasoning - Detailed reasoning: Section 295-485 of the ITAA 1997 allows a deduction to a complying superannuation fund or a complying approved deposit fund when: ● It pays a superannuation lump sum because of the death of a person to the trustee of the deceased’s estate or an individual who was a spouse, former spouse or child of the deceased at the time of death or payment; ● It increases the lump sum by an amount, or does not reduce the lump sum by an amount (the tax saving amount) so that the amount of the lump sum is the amount that the fund could have paid if no tax were payable on amounts included in assessable income under subdivision 295-C of the ITAA 1997. Therefore, a fund can deduct an amount under section 295-485 of the ITAA 1997 to ensure that the amount of a lump sum death benefit paid to a spouse, former spouse or child of the deceased is not reduced as a result of contributions being taxed. The deduction under section 295-485 of the ITAA 1997 is available so that the death benefit amount is not reduced because of the tax on contributions. The deduction effectively compensates the fund for the tax payable on the contributions that are used to fund the increased death benefit payment. Section 295-485 of the ITAA 1997 requires the fund to determine the amount that would have been paid as a superannuation lump sum if contributions were not included in the assessable income of the fund. Section 295-160 of the ITAA 1997 includes contributions and certain payments in an entity’s assessable income, and where the contributions are included in the assessable income of the fund, the amount available for payment as a superannuation lump sum will be lower. This is due to the tax paid not being available for crediting to the member’s account, and subsequently not being available to be invested to earn further income. A fund which pays this increased amount may claim the deduction (as calculated in accordance with section 295-485(3) of the ITAA 1997 from its assessable income in the income year in which the lump sum death benefit is made. In order to increase the amount it pays as a superannuation lump sum death benefit, a fund requires sufficient assets to pay both the death benefit (representing the deceased’s account balance at the time of death) and the increased tax savings amount. A fund cannot use another member’s vested benefits to pay the increased tax savings amount. Similarly, the entitlement to a deduction is not a direct refund provided by the Australian Taxation Office from future income tax benefit accounts. The Commissioner must be satisfied that the tax benefit has been passed on to the relevant beneficiaries and this requires the superannuation fund to have the resources to make the additional amount of death benefits from its own cash flow, reserves and assets. | Detailed Reasoning - Proposal 1: In this case, you propose that an anti-detriment amount will be paid through future income tax benefits. This means the Fund does not have sufficient assets in the current year to pay the amount proposed. Accordingly, the proposal does not give rise to a ‘tax savings amount’ and no deduction is available under section 295-485 of the ITAA 1997. | Detailed Reasoning - Proposal 2: In this case, you propose that an anti-detriment amount will be paid through current year tax savings. This means the Fund is not using its cash flow, reserves or assets to fund the additional death benefit. Accordingly, no deduction is available under section 295-485 of the ITAA 1997.