Private ruling: Deduction for increased amount of superannuation lump sum death benefit
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Can the superannuation fund claim a deduction under section 295-485 of the Income Tax Assessment Act 1997 in respect of an increased amount of superannuation lump sum death benefit? Advice/Answer No.


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 274 | Income Tax Assessment Act 1936 Section 279D | Income Tax Assessment Act 1936 Pt IX | Income Tax Assessment Act 1997 Division 295 | Income Tax Assessment Act 1997 Subdivision 295-C | Income Tax Assessment Act 1997 Section 295-160 | Income Tax Assessment Act 1997 Section 295-485 | Income Tax Assessment Act 1997 Subsection 295-485(1) | Income Tax Assessment Act 1997 Paragraph 295-485(1)(a) | Income Tax Assessment Act 1997 Paragraph 295-485(1)(b) | Income Tax Assessment Act 1997 Section 295-485(3) | Income Tax (Transitional Provisions) Act 1997 Section 295-485

Reasons for decision: Summary: You propose that upon the death of your spouse an anti detriment amount will be paid through the creation of a future income tax benefit account in the financial accounts of the Fund. This would create carry forward losses for the Fund which will be recouped in future years. In future years the Fund's income tax liabilities will be offset against this future income tax benefit account in the financial accounts of the Fund. 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 - Detailed reasoning: Section 295-485 of the Income Tax Assessment Act 1997 (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 (paragraph 295-485(1)(a) of the ITAA 1997); and 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 and section 274 of the Income Tax Assessment Act 1936 (ITAA 1936) (paragraph 295-485(1)(b) of the ITAA 1997 and section 295-485 of the Income Tax (Transitional Provisions) Act 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 (directly or indirectly via an estate) to a spouse, former spouse or child of the deceased is not reduced as a result of contributions being taxed. Section 295-485 is a re-write of former section 279D of the ITAA 1936 which applied to payments made by a complying superannuation fund to dependants of a deceased member before 1 July 2007. The Explanatory Memorandum to the Tax Laws Amendment (Simplified Superannuation) Act 2006 which introduced section 295-485 of the ITAA 1997 states that the rewritten provisions in Division 295 of the ITAA 1997 do not change the law as it operated under former Pt IX of the ITAA 1936. 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 Tax 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. In this case you propose that upon the death of your spouse an anti detriment amount will be paid through the creation of a future income tax benefit account in the financial accounts of the Fund. This would create carry forward losses for the Fund which will be recouped in future years. In future years the Fund's income tax liabilities will be offset against this future income tax benefit account in the financial accounts of the Fund. 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 under section 295-485 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | Relevant facts: You and your spouse are members of a self managed superannuation fund (the Fund). | Your spouse has had many medical issues and at present has a life expectancy of less than two years. | You propose that upon the death of your spouse an anti detriment amount will be paid through the creation of a future income tax benefit account in the financial accounts of the Fund. This would create carry forward losses for the Fund which will be recouped in future years. In future years the Fund's income tax liabilities will be offset against this future income tax benefit account in the financial accounts of the Fund. Further, you would be the sole member of the Fund. | You intend to work to age 65.