Private ruling: Deductions for increased amount of superannuation lump sum death benefits
Published: February 2015
Ruling period: Income year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the trustee of a superannuation fund (the Fund) able to claim a deduction under section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997) for the superannuation lump sum payment made to the spouse of a deceased member? | A1: Yes.

Relevant facts and circumstances: The Fund is a complying self-managed superannuation fund. Members of the Fund were a A (the Spouse) and B (the Deceased). The Deceased died during the income year ending 30 June 2015. The Deceased had an accumulation interest in the Fund which consisted wholly of a taxable component. The trustee of the Fund (the Trustee) has kept records of tax paid on the contributions of the Deceased. An insurance policy was held by the Fund for the life of the Deceased which was paid to the Fund in the income year ending 30 June 2015. The Trustee determined that the Spouse was to receive 100% of the Deceased's benefits in the Fund. The Spouse elected to take the benefits in the form of a lump sum benefit equal to the amount held in the accumulation account and the remainder in the form of a superannuation income stream.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 295-160 | Income Tax Assessment Act 1997 Section 295-485 | Income Tax Assessment Act 1997 Paragraph 295-485(1)(b) | Income Tax Assessment Act 1997 Subsection 295-485(2) | Income Tax Assessment Act 1997 Subsection 295-485(3) | Income Tax Assessment Act 1997 Section 307-65 | Income Tax Assessment Act 1997 Subsection 307-70(1) | Income Tax Assessment Regulations 1997 Regulation 995-1.01 | Income Tax Rates Act 1997 Paragraph 26(1)(a)

Reasons for decision: Summary: The Fund can claim a deduction if the amount of the superannuation lump sum paid is the amount the Fund could have paid if no tax was payable on amounts included in assessable income of the Fund. As the lump sum was paid in the income year ending 30 June 2015, the deduction can be claimed in the income year ending 30 June 2015. | Detailed Reasoning - Superannuation lump sum: Section 295-485 of the ITAA 1997 allows a deduction to a complying superannuation fund or a complying approved deposit fund, if a) 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 or *child of the deceased at the time of death or payment; and b) It increases the lump sum by an amount, or does not reduced 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. Superannuation lump sum is defined in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit. Under subsection 307-70(1) of the ITAA 1997, a superannuation income stream benefit is a superannuation benefit paid from a superannuation income stream as specified in the regulations. A superannuation income stream is defined in regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) to be: a) An income stream that is taken to be i. an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or ii. a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or iii. a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or b) an income stream that: i. is an annuity or pension within the meaning of the SIS Act; and ii. commenced before 20 September 2007. In this case, the Trustee paid both a superannuation lump sum benefit and an income stream benefit to the Spouse because of the death of the Deceased. Therefore, section 295-485 of the ITAA 1997 will apply to lump sum benefit only. | Detailed Reasoning - Tax saving amount: Paragraph 295-485(1)(b) of the ITAA 1997 allows the lump sum to be increased or not reduced by the tax saving amount so that the amount of lump sum paid 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. Subsection 295-485(2) of the ITAA 1997 states that the fund can deduct the amount in the income year in which the lump sum is paid. In calculating the tax saving amount, the fund trustee is not required to take into account expenses that are deductible against the assessable income of the fund (ATO ID 2008/112) but may take into account earnings foregone (ATO ID 2008/111). The amount the fund can deduct is outlined in subsection 295-485(3) of the ITAA 1997: • Tax saving amount / low tax component rate The low tax component rate is the tax rate imposed on the low tax rate component of the fund's taxable income for the income year. Paragraph 26(1)(a) of the Income tax Rates Act 1986 states that the low tax component rate is 15%. The balance of the Deceased's accumulation account from which the lump sum was paid comprised wholly of taxable contributions. Taxable contributions are included in a fund's assessable income under section 295-160 of the ITAA 1997. The amount of contributions tax paid divided by the low tax component rate of 15% is the amount of deduction the Fund can claim. As the lump sum was paid in the income year ending 30 June 2015, the Fund can claim a deduction in the income year ending 30 June 2015.