Deduction for increased amount of superannuation lump sum death benefit

Will the Commissioner accept an alternative method, as set out below, as a means of calculating the 'tax saving amount' in subsection 295-485(3) of the Income Tax Assessment Act 1997 (ITAA 1997) where the actual amount cannot be calculated by the superannuation fund?

Yes. The Commissioner will accept the following method of calculating the tax saving amount in subsection 295-485(3) of the ITAA 1997 where the actual amount cannot be calculated by the fund: (0.15*P)/ (R-0.15*P)*C

Where:

P = The number of days in component R that occur after 30 June 1988.

R = The total number of days in the service period as defined in section 307-400 of the ITAA 1997 that occur after 30 June 1983.

C = The taxable component of the lump sum calculated under section 307-125 of the ITAA 1997, as if no deduction under subsection 295-485(2) of the ITAA 1997 were allowed, after excluding the actual (if any) insured amount for which deductions have been claimed under section 295-465 or 295-470 of the ITAA 1997.

The superannuation fund is an accumulation fund. It is not a defined benefits 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. There are no elements untaxed in the fund.

The fund cannot calculate the amount of tax paid on amounts in the member's accounts as its 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 tax paid by that fund.

Section 295-485 of the ITAA 1997 allows a deduction to a complying superannuation fund or a complying approved deposit fund when: • 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, former spouse or child of the deceased at the time of death or payment (paragraph 295-485(1)(a) of the ITAA 1997); and • it increases the lump sum by an amount, or does not reduce 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 of the ITAA 1997 and section 274 of the Income Tax Assessment Act 1936 (ITAA 1936) (paragraph 295-485(1)(b) of the ITAA 1997 and section 295-485 of the Income Tax (Transitional Provisions) Act 1997 ).

In other words, a fund can deduct an amount under section 295-485 of the ITAA 1997 to ensure that the amount of a lump sum death benefit paid (directly or indirectly via an estate) to a spouse, former spouse or child of the deceased is not reduced as a result of contributions being taxed.

Subsection 295-485(3) of the ITAA 1997 provides that the amount a fund can deduct is calculated by the formula: Tax saving amount/Low tax component rate where: low tax component tax rate is the rate of tax imposed on the *low tax component of the fund's taxable income for the income year (i.e. 15%).

Under the now repealed section 279D of the ITAA 1936 (the predecessor provision to section 295-485 of the ITAA 1997), the Commissioner accepted an alternative formula for calculating the 'notional payment reduction due to contributions tax' under subsection 279D(2) of the ITAA 1936 where the actual amount cannot be calculated by the paying superannuation fund (ATO ID 2006/290 refers).

It was stated in ATO ID 2006/290 that the alternative method reflects the intention of the provision and 'calculates an approximate notional payment reduction taking into account the amount of the benefit that accrued after 30 June 1988'.

The fund has stated that it cannot calculate the actual amount of tax paid on the member's account as its records do not track the effect of fund tax on individual accounts over the membership period. The alternative method contained within ATO ID 2006/290 has therefore been updated to take into account the amendments to the income tax legislation regarding superannuation funds that apply after 30 June 2007.

The formula stated above calculates an approximate tax saving amount so as to give effect to the intention of section 295-485 of the ITAA 1997.