Private ruling: Death & Disability - revocation of choice
Published: September 2013
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Can the Fund claim a deduction on a premiums paid basis for a division pursuant to subsection 295-465(1) of the Income Tax Assessment Act 1997 (ITAA 1997) and the self-insurance basis for another division pursuant to subsection 295-465(2) of the ITAA 1997 from 1 July 20XX? Advice/Answer Yes.

Relevant facts and circumstances: The Fund is a complying superannuation fund comprising of division A and division B. The Fund pays benefits to members or dependants as a consequence of death, temporary disablement or permanent disablement of members. The Fund has been self insuring death and disability risk for over Y years. At present, a deduction under section 295-470 of the Income Tax Assessment Act 1997 (ITAA 1997) is claimed for the future service element of the death and disability benefit being paid. From 1 July 20XX the Fund will enter into death and disability insurance policy contracts with an external insurer for division A. These contracts will be extended to cover its other division B at a later date. As a result of the changes, the Fund believes it would be more appropriate to claim a deduction on a premiums paid basis for division A pursuant to subsection 295-465(1) of the ITAA 1997 and the self insurance basis for division B pursuant to subsection 295-465(2) of the ITAA 1997. The Fund requests the exercise of the Commissioners discretion pursuant to subsection 295-465(5) of the ITAA 1997 for this change in methodology.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 295-G | Income Tax Assessment Act 1997 Section 295-460 | Income Tax Assessment Act 1997 Section 295-465 | Income Tax Assessment Act 1997 Section 295-470 Further issues for you to consider | None.

Reasons for decision: Summary: From 1 July 2013 the Commissioner will allow the Fund to claim a deduction on a premiums paid basis for division A and the self-insurance basis for division B. | Detailed Reasoning - Detailed reasoning: Subdivision 295-G of the Income Tax Assessment Act 1997 (ITAA 1997) contains a number of specific deductions for superannuation entities. Section 295-460 of the ITAA 1997 sets out benefits for which a deduction is available and provides that sections 295-465 and 295-470 of the ITAA 1997 apply to the following benefits: · superannuation death benefits · disability superannuation benefits · benefits because of a temporary inability to work. Note 1 to section 295-460 of the ITAA 1997 provides that the fund can deduct amounts in relation to these benefits under either section 295-465 or 295-470 of the ITAA 1997, but not both. Under section 295-465 of the ITAA 1997 a complying superannuation fund can claim a deduction related to the cost of providing the above benefits calculated on a premiums basis. Alternatively, under section 295-470 of the ITAA 1997 a complying superannuation fund can claim a deduction by using a formula based on actual costs of providing the benefits which arise each year. Section 295-465 of the ITAA 1997 states: (1) A complying superannuation fund can deduct the proportions specified in this table 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. | Detailed Reasoning - The fund can deduct this amount:: 1 30% of the premium for a whole of life policy if all individuals whose lives are insured are members of the fund 2 10% of the premium for an endowment policy if all individuals whose lives are insured are members of the fund 3 30% of the part of an insurance policy premium (for a policy that is not a whole of life policy or an endowment policy) that is specified in the policy as being for a distinct part of the policy, if that part would have been a whole of life policy had it been a separate policy 4 10% of the part of an insurance policy premium (for a policy that is not a whole of life policy or an endowment policy) that is specified in the policy as being for a distinct part of the policy, if that part would have been an endowment policy had it been a separate policy 5 The part of a premium that is specified in the policy as being wholly for the liability to provide certain benefits, if those benefits are benefits referred to in section 295-460 6 So much of other insurance policy premiums as are attributable to the liability to provide benefits referred to in section 295-460 (1A) If item 5 of the table applies to part, but not all, of an insurance policy premium, item 6 of the table applies to the rest of the premium as if item 5 did not apply to the premium. (1B) For the purposes of item 6 of the table, the regulations may provide that a specified proportion of a specified insurance policy premium may be treated as being attributable to the complying superannuation fund's liability to provide benefits referred to in section 295-460. Deductions for self-insurance (2) A complying superannuation fund can also deduct the amount it could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for that part of its current or contingent liabilities to provide benefits referred to in section 295-460 for which it does not have insurance coverage. It can deduct the amount for the income year when it has the liability. (2A) For the purposes of subsection (2), the regulations may provide that a specified proportion of an amount mentioned in subsection (2B) may be treated as being the amount the fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy to cover it for its current or contingent liabilities to provide benefits referred to in section 295-460. Example: If: (a) an actuary certifies the amount a fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy; and (b) the insurance policy covers liabilities of the fund to provide a class of total and permanent disability benefits broader than that covered by section 295-460; and (c) the insurance policy is specified in the regulations; and (d) the fund does not have insurance coverage for the liabilities; the fund may deduct, under subsection (2), so much of that certified amount as is specified in the regulations. (2B) The amount is the amount a complying superannuation fund could reasonably be expected to pay in an arm's length transaction to obtain an insurance policy specified in the regulations. Actuary's certificate (3) The trustee must obtain an actuary's certificate before the date for lodgment of the fund's income tax return for the income year in order to deduct an amount referred to in item 6 of the table or in subsection (2). (3A) Subsection (3) does not apply to an amount referred to in item 6 of the table in relation to an insurance policy premium, if the trustee deducts, under that item, only the proportion (if any) of the premium specified in the regulations made for the purposes of subsection (1B). Choice not to deduct amounts under this section (4) The trustee may choose not to deduct amounts under this section for an income year and to deduct instead (under section 295-470) amounts based on the fund's future liability to pay the benefits. (5) The choice applies also to future income years unless the Commissioner decides that it should not. Section 295-465 of the ITAA 1997 does not state that subsections (1) and (2) cannot both be used or that use of one precludes use of the other. The Explanatory Memorandum (EM) to the legislation that introduced Subdivision 295-G, Tax Laws Amendment (Simplified Superannuation) Act 2007 , supports the interpretation that both subsections of 295-465 can be employed by the one fund. Paragraph 3.67 states: A complying superannuation fund can deduct part of the premiums it pays on insurance policies to cover its liability to pay death or disability benefits to fund members. It can also deduct the amount it could reasonably expect to pay for such a policy if it does not have one. Paragraph 3.68 goes on to say: Alternatively, the fund can choose to deduct an amount for its future liability to pay death or disability benefits. Therefore, under subsection 295-465 of the ITAA 1997 the self insurance basis may be used in addition to the premiums paid deduction. However, a complying superannuation fund cannot make a deduction pursuant to section 295-465 of the ITAA 1997 where it has elected to make a deduction pursuant to section 295-470 of the ITAA 1997. This election must be made by the fund's tax return lodgment date for the year in which the election is to apply. Once made, the election also applies for all later years unless the Commissioner allows otherwise. In this case, the Fund is a complying superannuation fund comprising of division A and division B. At present, a deduction under section 295-470 of the Income Tax Assessment Act 1997 (ITAA 1997) is claimed for the future service element of the death and disability benefit being paid based on an election made earlier. Due to a number of commercial reasons and practicalities, from 1 July 20XX the Fund will enter into death and disability insurance policy contracts with an external insurer for division A. These contracts will be extended to cover the Fund's division B at a later date. From 1 July 20XX the Commissioner accepts that it would be appropriate for the Fund to claim a deduction on a premiums paid basis for division A pursuant to subsection 295-465(1) of the ITAA 1997 and the self insurance basis for division B pursuant to subsection 295-465(2) of the ITAA 1997.