Private ruling: Exempt current pension income - effect on deductions
Published: July 2012
Ruling period: Year ending 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Does the expense incurred by the Fund for repairs require apportioning? Advice/Answer Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Subdivision 295-F.

Reasons for decision: Summary: The Fund is entitled to claim a deduction for the repair. However, as one member of the Fund is in pension phase and the remaining members are in accumulation phase, the deduction (being an apportionable expense) must be apportioned between the exempt income and the assessable income of the Fund. | Detailed Reasoning - Deduction for complying superannuation funds: The deductibility of expenditure incurred by a complying superannuation fund is determined under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) unless a specific provision applies. Generally, the expenditure of a superannuation fund, which is not of a capital, private or domestic nature, is deductible under section 8-1 of the ITAA 1997 to the extent that: · it has the essential character of an outgoing incurred in gaining or producing assessable income, or · it has the character of an operating or working expense of a business or is an essential part of the cost of the superannuation fund's business operations. Taxation Ruling TR 93/17 (TR 93/17) entitled ' Income Tax: income tax deductions available to superannuation funds' which explains the general principles governing the tax deductibility of expenditure incurred by superannuation funds states at paragraphs 6 and 7: 6. Expenditure incurred in gaining or producing exempt income only is not deductible. Expenditure (eg general administrative expenses of managing a superannuation fund) which is incurred partly in producing assessable income and partly in gaining exempt income must be apportioned. The expenditure is deductible only to the extent to which it is incurred in producing assessable income. Each of the expenses listed in paragraph 4 would need to be apportioned if it is incurred partly in producing assessable income and partly in producing exempt income. 7. The correct method for apportioning expenditure between assessable income and exempt income depends on the particular circumstances of the case. If there is a single outlay in respect of a thing or service, only part of which is used for gaining or producing assessable income, then the following principles apply: (a) If a distinct and severable part of the thing or service is devoted to gaining or producing assessable income and part is not, the expenditure can be apportioned according to the ratio of those parts. Where possible a superannuation fund should apportion its expenditure in this way. (b) If an outlay serves both objects indifferently, another method must be used to apportion the expenditure which gives a fair and reasonable assessment of the extent to which it relates to assessable income. As income derived from assets used to support pension payments are exempt from income tax superannuation funds cannot claim a deduction for expenses relating to those assets. Where an expense is incurred that relates to both the accumulation and pension phase of a superannuation fund, the expense must be apportioned so that only the proportion relating to the production of assessable income is claimed as a deduction. The correct method for apportioning expenditure will depend on the particular circumstances of the case and must give a fair and reasonable assessment of the extent to which the expense relates to assessable income. | Detailed Reasoning - Exempt current pension income: Subdivision 295-F of the ITAA 1997 operates to exempt from income tax some of the income of a superannuation fund. This income includes the income earned from assets that are used to pay current superannuation income stream benefits. There are two ways to claim a tax exemption in respect of the current pension income in an income year. These depend on whether the superannuation funds assets, at the time the pension starts to be paid, are: · segregated current pension assets; or · unsegregated current pension assets. A superannuation fund has unsegregated current pension assets at a time if the assets are not specifically set aside to enable the superannuation fund to discharge all or part of its liabilities (contingent or not) in respect of superannuation income stream benefits that are payable by the superannuation fund at that time. In this case one member of the Fund is in pension phase and the remaining members in accumulation phase. The assets of the Fund are unsegregated. Accordingly, an actuarial certificate has been obtained certifying the proportion of the applicable income of the Fund for the 2010-11 income year that is exempt from income tax. The Commissioner had earlier advised in a private ruling that the repair is regarded as a deductible repair. You have provided an invoice which shows the expense incurred by the Fund. As the proportion of the applicable income of the Fund for the 2010-11 income year that is exempt from income tax is X%, the proportion of the applicable income of the Fund that is not exempt from income tax is Y%. Therefore, the Fund may claim a deduction for Y% of the repair as representing the expenditure incurred in gaining or producing the assessable income of the Fund.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The benefits being provided by the Fund comprise of an accumulation account and an account-based pension. | One member of the Fund is in accumulation phase. | An actuarial certificate certifies the proportion of the applicable income of the Fund for the 2010-11 income year that is exempt from income tax. | In the 2009-10 income year the Fund purchased an investment property (the Property). | The trustees of the Fund were advised that the Property needed repairs. | An invoice shows the expense incurred by the Fund. | The Commissioner advised that repair is regarded as a deductible repair.