Issue
In calculating the 'tax saving amount' for the purposes of paragraph 295-485(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), is a fund trustee required to take into account expenses that are deductible against the assessable income of the fund?
Decision
No. In calculating the 'tax saving amount' for the purposes of paragraph 295-485(1)(b) of ITAA 1997, a fund trustee is not required to take into account expenses that are deductible against the assessable income of the fund.
Facts
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.
Taxable contributions are included in the assessable income of the fund. The expenses of the fund include amounts that are either directly or indirectly incurred in relation to the taxable contributions.
In calculating the tax saving amount for the purposes of section 295-485 of the ITAA 1997, the fund does not reduce taxable contributions by the deductible expenses in determining the tax paid on the contributions.
Reasons for Decision
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 Income Tax Assessment Act 1936 (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 295-485 of the ITAA 1997 is a rewrite of section 279D of the ITAA 1936. The Explanatory Memorandum to Taxation Laws Amendment (Superannuation) Bill 1989 states in relation to section 279D of the ITAA 1936 that the provision: ... is intended to ensure that the level of death benefits that can be paid from a complying superannuation fund ...are not reduced as a result of tax on taxable contributions.
Similarly the Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 4) Bill 2007 states in relation to section 295-485 of the ITAA 1997 that: ... the increased amount is equal to the tax paid for contributions included in the assessable income of the superannuation entity.
The extracts from the Explanatory Memorandums above make it clear that the intent of the deduction under section 295-485 of the ITAA 1997 (being a rewrite of the former section 279D of the ITAA 1936) is to ensure death benefit payments are not reduced as the result of the introduction of tax on contributions.
The deductible expenses of the fund include expenses incurred either directly or indirectly in relation to the taxable contributions of the fund. However, section 295-95 of the ITAA 1997 (for the 2007-08 income year onwards) and section 277 of the ITAA 1936 (for earlier income years) provide that in determining whether an expense is deductible, contributions should be taken to be assessable income of the fund, whether or not the contributions are actually included in assessable income. Accordingly, the deductible expenses of the fund in relation to contributions would be deductible whether or not the contributions were assessable. The deductible expenses therefore should not affect the calculation of the 'tax saving amount'.
Accordingly, to satisfy the intent of section 295-485 of the ITAA 1997, the calculation of the effect of tax on the contributions received by the fund trustee should be done without regard to expenses, including expenses incurred either directly or indirectly in relation to those contributions.
Therefore, in calculating the 'tax saving amount' for the purposes of paragraph 295-485(1)(b) of the ITAA 1997, the fund trustee is not required to take into account expenses that are deductible against the assessable income of the fund.