An ATO private binding ruling has highlighted the interplay between tax laws that allow an SMSF to make a future service deduction for life insurance premiums paid for a member, noting where this is disallowed the fund may not be restricted from claiming a deduction for annual premium costs.
The ruling, released at the start of this week, but handed down on 7 October, related to two sections of the Income Tax Assessment Act 1997 (ITAA 1997) dealing with the deductions available to an SMSF for insurance premiums paid for a member by a fund.
The issue addressed was whether the trustee of an SMSF could choose under subsection 295-465(4) of the ITAA 1997 not to claim a deduction for total and permanent disability (TPD) premiums for the 2023 financial year, but instead deduct those amounts under section 295-470 based on the fund’s future liability to pay the benefits, and if the latter was denied, revert to the former to make a deduction.
The ATO stated this was possible in the case before it and noted the relevant member in the SMSF had ceased employment due to becoming permanently incapacitated during the 2020 financial year and this had been attested to by two medical practitioners.
At the same time, a TPD policy for the member had been paid for by the SMSF and was in force during the 2023 financial year and an insurance benefit was paid to the fund in the same year, with the member receiving a disability superannuation benefit when they their rolled super benefits to an Australian Prudential Regulation Authority-regulated fund.
In making its decision, the ATO stated: “As the fund had a future liability to pay TPD benefits in the 2022/23 financial year, an election pursuant to subsection 295-465(4) being made prior to the lodgement of the 2022/23 SMSF annual return, entitles the fund to claim a deduction under section 295-470 in relation to TPD benefits paid out in respect of the member in the 2022/23 financial year.
“The effect of subsections 295-465(4) and (5) is that once a fund makes an election under subsection 295-465(4), they must claim deductions in accordance with section 295-470 and cannot revert to claiming deductions under subsection 295-465(1), unless the commissioner decides otherwise.”
In deciding otherwise, the regulator stated its reason for allowing the SMSF to make a deduction under subsections 295-465 if the same was denied under subsection 295-470 was because the law restricted the fund to making a deduction claim under those subsections only.
“The notes to subsection 295-460 provide that the fund can only deduct amounts in relation to these benefits under either section 295-465 or 295-470, not both,” the ruling noted.
“Subject to meeting their legislated conditions, subsections 295-465 and 295-470 are alternatives – that is, you can either claim under one, or the other.
“As such, should the commissioner disallow the claim under section 295-470, the fund still retains the right to the alternative claim under section 295-465 instead.”
