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

Will the Commissioner accept the method 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)?

Yes. The Commissioner will accept the following method of calculating the 'tax saving amount' in subsection 295-485(3) of the ITAA 1997: (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 sections 307-120 and 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 sections 295-465 or 295-470 of the ITAA 1997.

The Fund is a large complying superannuation fund that is an accumulation fund, not a defined benefits fund.

Member 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's records do not track the effect of fund tax on the accounts of individual members. In order to determine the effect of fund tax on the accounts of individual members, the Fund would have to reconstruct those accounts from its records over the membership period.

The Fund is a taxed superannuation fund. There are no elements untaxed in the Fund. Members may transfer superannuation benefits from other superannuation funds to the 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 former 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 ensure that the amount of a lump sum death benefit paid (directly or indirectly via the trustee of the deceased's estate) to a spouse, former spouse or child of the deceased is not reduced as a result of contributions being taxed in the fund.

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 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%)

Section 295-485 of the ITAA 1997 is a rewrite of former section 279D of the ITAA 1936. Section 279D applied to payments made before 1 July 2007.

Section 279D of the ITAA 1936 allowed a deduction to a superannuation fund which paid a death benefit to a dependant of the deceased member where the fund increased the benefit to the amount that would have been paid had there been no tax on contributions. The Explanatory Memorandum (EM) to the Taxation Laws Amendment (Superannuation) Bill 1989, which inserted section 279D, prescribed a method of calculation which would provide an acceptable basis for determining the amount that could be deducted under section 279D. This formula provided an alternative to the calculation of the relevant amount by the auditor of the fund where the fund was not a defined benefit fund.

ATO ID 2006/290 gave approval to a method of calculation of the deduction under section 279D of the ITAA 1936. The method endorsed in ATO ID 2006/290 provided an updated version of the formula contained within the EM and was more appropriate than that formula in the situation of an accumulation fund.

The method of calculation contained within ATO ID 2006/290 was updated in ATO ID 2007/219 to take into account the amendments to the income tax legislation affecting superannuation funds that apply after 30 June 2007. ATO ID 2007/219 referred to the situation where the superannuation fund could not calculate the tax paid on amounts in the member's accounts as the fund's records 'do not track the effect of fund tax on individual accounts over the membership period'.

However, the formula in ATO ID 2007/219 is also appropriate in situations where the Fund's records do not track the effect of fund tax on the accounts of individual members but the Fund may have been able to calculate the amount of tax paid on amounts in these accounts if it was to reconstruct those accounts from its records to take into account the effect of fund tax on the individual accounts over the membership period.

The calculation method stated above is consistent with the formula in ATO ID 2007/219 and calculates an approximate 'tax saving amount' so as to give effect to the intention of section 295-485 of the ITAA 1997.