Part IX taxation of superannuation entities: deduction for superannuation funds for additional lump sum death benefits paid after the death of a fund member.

Will the Commissioner accept an alternative method, as set out below, as a means of calculating the notional payment reduction due to contributions tax in subsection 279D(2) of the Income Tax Assessment Act 1936 (ITAA 1936) as the actual amount cannot be calculated by the superannuation fund?

Yes. The Commissioner will accept the following method of calculating the notional payment reduction where the actual reduction cannot be calculated by the paying superannuation fund: (0.15P) / (R- 0.15P) * C Where: P is the number of days in component R that occur after 30 June 1988. R is the total number of days in the eligible service period that occur after 30 June 1983. C is the amount of the post-June 83 component of the 'actual payment' referred to in paragraph 279D(2)(b) calculated under section 27AA of the ITAA 1936 after excluding the actual, if any, insured amount for which deductions have been claimed under sections 279 or 279B of the ITAA 1936.

The superannuation fund is an accumulation fund. Member's benefits are the sum of contributions and investment income earned on those contributions over the period of membership, less expenses such as fees, taxes and insurance premiums.

The Fund is a taxed superannuation fund.

The Fund cannot calculate the amount of tax paid on amounts in the member's account as their records do not track the effect of fund tax on individual accounts over the membership period.

Members may transfer superannuation benefits from other superannuation funds to the Fund. The details of the benefits transferred from other superannuation funds do not include the actual effect of fund tax.

The Fund does not pay benefits that include amounts calculated under subsections 27AB(4) or (6) of the ITAA 1936

The Fund has proposed the following formula to calculate the notional payment reduction under subsection 279D(2) of the ITAA 1936: (0.15P) / (R- 0.15P) * C Where: P is the number of days in component R that occur after 30 June 1988. R is the total number of days in the eligible service period that occur after 30 June 1983. C is the amount of the post-June 83 component of the 'actual payment' referred to in paragraph 279D(2)(b) calculated under section 27AA of the ITAA 1936 after excluding the actual, if any, insured amount for which deductions have been claimed under sections 279 or 279B of the ITAA 1936.

Section 279D of the ITAA 1936 allows a deduction to a superannuation payer when a death benefit payment to a dependant either directly, or via an estate, has been increased to the amount that would have been payable if taxable contributions in relation to the member had not been included in the assessable income of the fund.

The deduction allowable is calculated by reference to the increase in the death benefit.

Subsection 279D(2) provides that the deduction is to be calculated as follows: Notional payment reduction due to contributions tax/Complying superannuation tax rate Where Notional payment reduction due to contributions tax is the difference between: (a) the amount that would have been the amount of the actual payment if: (i) no amount were included in assessable income in relation to taxable contributions made to a complying superannuation fund; and (ii) it had been expected that no deduction would be allowable under this section in respect of the actual payment; and (b) the amount that would have been the amount of the actual payment if it had been expected that no deduction would be allowable under this section in respect of the payment.

The Explanatory Memorandum (EM) prescribed a method of calculation of the notional payment reduction that would generally be accepted by the Commissioner. However, the method contained in the EM is considered inappropriate by the Fund as it assumes a defined death benefit, whereas the Fund provides a number of choices to members in relation to insurance. Application of the formula in the EM results in a lower amount than is intended.

An alternative method that reflects the intention of the provision has been suggested as set out in the Facts. It calculates an approximate notional payment reduction taking into account the amount of the benefit that accrued after 30 June 1988 when this tax was introduced.

In the view of the Commissioner, the alternative method proposed acceptably estimates the notional payment reduction in the circumstances outlined.