Part IX taxation of superannuation entities - Superannuation fund expenses - trauma policy

Is a deduction available to the trustee of the complying superannuation fund under subsection 279(1) of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of premiums paid by the fund for a trauma policy?

No. The trustee of the superannuation fund cannot claim a deduction under subsection 279(1) of the ITAA 1936 in respect of the premiums paid for the trauma policy.

The trustee of a complying superannuation fund pays a premium for a trauma insurance policy in respect of its members. The terms of the trauma policy provide that, where a member suffers a specified medical condition, the member will receive a lump sum amount to compensate for the injury or illness. The trauma policy does not contain any elements that would satisfy the definition of a 'whole of life policy' or 'endowment policy' under subsection 267(1) of the ITAA 1936.

The taxable income of a complying superannuation fund is determined as if the trustee were a taxpayer and a resident (section 272 of the ITAA 1936). As a general rule, the deductibility of expenditure incurred by a complying superannuation fund is governed by the general deduction provisions of the ITAA 1936, unless a specific provision applies or the general rules are modified.

Subsection 279(1) of the ITAA 1936 outlines the circumstances in which the trustee of a complying superannuation fund may claim a deduction for premiums paid for death or disability cover. Paragraphs 279(1)(a) and (b) of the ITAA 1936 deal with 'whole of life' and 'endowment' policies respectively. These paragraphs are not relevant to the trauma policy.

Paragraph 279(1)(c) of the ITAA 1936 provides that, where a trustee of a complying superannuation fund pays a premium for an insurance policy in respect of the liability of the fund to provide death or disability benefits for the members of the fund, any part of that premium that is specified as being wholly in respect of that liability is allowable as a deduction.

Subsection 267(1) of the ITAA 1936 defines 'death or disability benefit' in relation to a member of a complying superannuation fund, as: • a benefit provided in the event of the death of the member; • a benefit provided to the member in the event of permanent disability; or • a benefit provided to the member, by way of income, during a period when the member is unable to perform the normal duties of the member's employment, being a period of either two years or a longer period, as approved.

The trauma policy does not meet the definition of a 'death or disability benefit', as: • the payment of the trauma policy benefit is not conditional on the death of a member of the superannuation fund; • permanent disability is not part of the criteria under which the trauma policy can pay a benefit; and • the trauma policy does not provide a benefit by way of income. Irrespective of whether some temporary period of disability occurs, a lump sum payment is made to compensate for the specified medical condition and not for the loss of income earning capacity of the member. Accordingly, the benefit provided under the trauma insurance policy is a capital amount.

A deduction is not available under paragraph 279(1)(c) of the ITAA 1936 as the trauma policy does not provide a 'death or disability benefit' within the meaning of subsection 267(1) of the ITAA 1936. [Note 1: where a policy has separate components, each with its own premium, and one of those components meets the definition of a death or disability benefit, then the premium that corresponds with that component will be deductible. Note 2: Paragraphs 43 to 47 of APRA Circular No. III.A.4 make reference to the amount of contributions applied to purchase trauma insurance policies. They state that it is considered an unreasonable diversion of contributions as premiums for the contingent trauma cover would be difficult to reconcile with the sole purpose test and the fundamental retirement objective of superannuation.]