ATO Interpretative Decision

ATO ID 2009/99

Income Tax

• This ATO ID, which continues to apply, has been amended to include references to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) which replaced the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) referred to in this ATO ID. All references to provisions of the ITAA 1936 should therefore be taken as including reference to their replacement provisions in the ITAA 1997.
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Issue

Is the trustee of a superannuation fund entitled to a deduction under paragraph 279(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936) for a premium paid for a whole of life policy where the premium is dissected between an entry fee and the investment component of the policy?

Decision

No, the trustee of a superannuation fund is not entitled to a deduction under paragraph 279(1)(a) of the ITAA 1936 for a premium paid for a whole of life policy where the premium is dissected between an entry fee and the investment component of the policy.

Facts

The trustee of a superannuation fund paid a single premium to a life insurance company for a policy titled a 'whole of life policy'.

Under the policy the trustee of the superannuation fund can select an investment option in relation to the policy.

An entry fee of 6% of the premium is charged under the policy. In addition, annual policy fees and a 1.5% exit fee are also charged under the policy.

The life insurance company will invest the balance of the premium (after the entry fee has been deducted) in accordance with the investment option selected by the trustee of the superannuation fund.

The policy provides that a benefit is payable when either of the following occurs:

•

death of the insured member of the superannuation fund; or

•

surrender of the policy by the trustee of the superannuation fund

The benefit payable on death of the insured member of the superannuation fund is 101% of the surrender value of the policy.

The benefit payable on the surrender of the policy by the trustee of the superannuation fund is the surrender value of the policy.

The surrender value of the policy is determined as the amount of premiums received, less fees charged under the policy (including the 6% entry fee) plus or minus any amounts that the life insurance company may add to or deduct from the value of the policy in relation to the investment returns of the life insurance company from the investment of the premium.

Reasons for Decision

Paragraph 279(1)(a) of the ITAA 1936 allows the trustee of a complying superannuation fund a deduction of 30% of the premium payable under a whole of life policy where the policy is, in whole or in part, in respect of a current or contingent liability of the fund to provide death or disability benefits for members of the fund.

A whole of life policy is defined for these purposes in subsection 267(1) of the ITAA 1936 as an insurance policy that satisfies certain conditions.

One of these conditions is that the premium is not dissected, whether by reference to the investment component or otherwise (refer to paragraph (b) of the definition).

The design of section 279 of the ITAA 1936 indicates that the intent of paragraph 279(1)(a) of the ITAA 1936 is to allow a deduction in relation to whole of life policies where the amount of the premium that is attributable to the risk component (that is, death or disability cover) is bundled with the amount of the premium attributable to the other components of the policy.

The concept of bundling the components of a policy is discussed in Taxation Ruling TR 2003/14: Life insurance companies: the actuarial determination of fees and charges. Paragraph 6 of TR 2003/14 states that:

A bundled policy includes a traditional whole of life or endowment policy. The components of the policy in respect of investment, risk and administration are bundled (that is, not readily identified) in the way the terms of the policy are defined and the manner the business is managed. Segregation of the components of the policy is impractical and inconsistent with the nature and management of the business.

The policy entered into between the trustee of the superannuation fund and the life insurance company clearly identifies an investment component (being the amount of the premium less the 6% entry fee paid). The policy also includes an annual policy fee and an exit fee. The explicit nature of these fees indicates that the investment and other components of the policy are not bundled. While the policy does not specify how much of the fees relate to the risk and administration components of the policy, it is clear that these components of the policy are separate and distinct from the investment component of the policy.

The explicit identification of the entry fee indicates that the amount of the premium has been dissected. The definition of a whole of life policy in subsection 267(1) of the ITAA 1936 does not require that the premium not be separately dissected into the investment, risk and administration components. It merely requires that the premium not be dissected 'by reference to the investment component or otherwise'. As the premium is clearly dissected between the investment component and other components, the policy does not satisfy the definition of a whole of life policy in subsection 267(1).

As the policy does not satisfy the requirements of paragraph (b) of the definition of a whole of life policy in subsection 267(1) of the ITAA 1936, it is not necessary to consider whether the policy satisfies the conditions of paragraphs (a) and (c) of the definition.

Accordingly, as the policy is not a whole of life policy as defined in subsection 267(1) of the ITAA 1936, a deduction is not allowable under paragraph 279(1)(a) of the ITAA 1936 for 30% of the premium paid under the life insurance policy.

Note

Although the life insurance premium is not deductible under paragraph 279(1)(a) of the ITAA 1936, it may be deductible under another paragraph of subsection 279(1) of the ITAA 1936, subject to satisfying the other conditions of section 279 of the ITAA 1936.

The discussion in this ATO ID has equal application to section 295-465 and subsection 295-480(1) of the Income Tax Assessment Act 1997 which replaced section 279 and the definition of 'whole of life policy' in subsection 267(1) of the Income Tax Assessment Act 1936 (ITAA 1936) respectively. All references to section 279 and paragraph 279(1)(a) of the ITAA 1936 and the ITAA 1936 subsection 267(1) 'whole of life policy' definition should therefore be taken as including reference to section 295-465, subsection 295-465(1) and subsection 295-480(1) of the ITAA 1997 respectively.

Year of income:  Year ending 30 June 2009

Legislative References:
Income Tax Assessment Act 1936
   subsection 267(1)
   section 279
   paragraph 279(1)(a)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2003/14

Related ATO Interpretative Decisions
ATO ID 2009/100

Keywords
Complying superannuation funds
Death benefits - superannuation benefits
Life insurance company
Life insurance policies
Insurance bonds

Siebel/TDMS Reference Number:  6125068

Business Line:  Superannuation

Date of publication:  11 September 2009

ISSN: 1445-2782