Complying superannuation fund: deduction for increased amount of superannuation lump sum death benefit - earnings foregone

In calculating the 'tax saving amount' for the purposes of paragraph 295-485(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), can a fund trustee take into account the earnings that would have accrued if no tax had been imposed on contributions included in assessable income under Subdivision 295-C of the ITAA 1997 or under former section 274 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. In calculating the 'tax saving amount' for the purposes of paragraph 295-485(1)(b) of the ITAA 1997 a fund trustee can take into account the earnings that would have accrued if no tax had been imposed on contributions included in assessable income under Subdivision 295-C of the ITAA 1997 or under former section 274 of the ITAA 1936.

The taxpayer is a complying superannuation fund.

The fund only provides accumulation benefits. Accordingly, member benefits are determined by reference to the sum of contributions and investment income credited over the period of membership, less expenses such as fees, taxes and insurance premiums.

In calculating the tax saving amount for the purposes of section 295-485 of the ITAA 1997, the fund takes into account the tax paid on contributions plus a further amount representing the earnings that would have accrued on the amount of tax paid on contributions if those contributions had not been subject to tax.

The accounting records of the fund allow it to determine the contributions that have been subject to tax in respect of each member.

The fund also has the historical records that allow it to calculate the earnings that would have accrued on the amount of tax paid on contributions.

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; 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 former section 274 of the ITAA 1936.

The provision requires the fund to determine the amount that would have been paid as a superannuation lump sum if contributions were not included in the assessable income of the fund.

Section 295-160 of the ITAA 1997 includes contributions and certain payments in an entity's assessable income. If contributions are included in the assessable income of the fund, the amount available for payment as a superannuation lump sump will be lower. This is due to the tax paid not being available for crediting to the member's account, and subsequently not being available to be invested to earn further income.

Section 295-485 of the ITAA 1997 is a rewrite of section 279D of the ITAA 1936. The Explanatory Memorandum to Taxation Laws Amendment (Superannuation) Bill 1989 stated the following in relation to section 279D: Section 279D provides that, where one of these paying entities pays a lump sum death benefit that is not an ETP and that would be exempt from tax under the existing law, that entity will be allowed a deduction sufficient, given the rate of tax payable by a complying superannuation fund, to compensate the fund for increasing the funded component of the benefit to that which would have been paid, assuming the same level of contributions and earnings of the fund, had there been no tax on contributions. (emphasis added)

The words emphasised indicate that something more than just the tax on contributions should be included in the tax saving amount. Further, the Second Reading Speech to the Taxation Laws Amendment (Superannuation) Bill 1989 contains the following statement in relation to the purpose of section 279D of the ITAA 1936: Thirdly, by authorising tax reductions in appropriate cases, the Bill gives effect to our commitment that no recipient of a superannuation benefit will be worse off because of the tax on superannuation contributions.

These statements make it clear that the purpose of the deduction in the former section 279D of the ITAA 1936 and in section 295-485 of the ITAA 1997 is to ensure that the amount of a lump sum death benefit is not reduced as a result of contributions having been subject to tax.

This is only achieved if the earnings foregone are taken into account in determining the tax savings amount for the purposes of section 295-485 of the ITAA 1997. To exclude these earnings from the determination of the amount under section 295-485 would mean that the superannuation lump sum recipient was worse off because of the tax on superannuation contributions.

Accordingly, in calculating the tax saving amount for the purposes of paragraph 295-485(1)(b) of the ITAA 1997, a fund trustee can take into account the earnings that would have accrued if no tax had been imposed on contributions included in assessable income under Subdivision 295-C of the ITAA 1997 or under former section 274 of the ITAA 1936.