Section 295-470 of the ITAA (Future Service Benefit) allows a Fund to claim an income tax deduction on the payment of:
1. a superannuation death benefit; or
2. a terminal illness benefit; or
3. a disability superannuation benefit or
4. a temporary incapacity income stream.
The deduction, also known as the Future Liability deduction, is available irrespective of whether the benefit is paid as a pension, lump sum or combination and can be used to offset current and future income tax liabilities.
The payment must involve a termination of a member’s employment or self employment. For this reason, it is generally only available if the event occurs prior to the member’s 65th birthday. The deduction is also only available as an alternative to taking a deduction for life insurance premiums so, to be eligible, the Fund must hold a life insurance policy on the member’s life and a premium must have been paid in the year of the event. In order to minimise the possibility that a premium is not paid in the relevant year we suggest that all premiums be paid as frequently as possible – monthly, or even fortnightly, if available. Once a fund has claimed this deduction it can never again take a deduction for insurance premiums. It is for this reason that this deduction is, generally, only taken by SMSFs.
The size of the deduction depends on the size of the total benefit. The amount of life insurance included in the benefit payment is irrelevant with the same deduction being achieved for a given benefit irrespective of whether it was predominantly sourced from life insurance or from savings.
Caution must be exercised as, though holding an insurance policy with tax deductible premiums is a prerequisite to claiming a Future Service Deduction, it will also cause an untaxed element to be created in the taxable component of the member’s benefit if the beneficiary of the payment is not a tax dependent. Typically, this will arise when the beneficiary is an adult, independent child.
The formula for calculating the deduction is:
Future service days
Benefit amount x ____________________
Total service days
Benefit amount is the lump sum or the purchase price of the pension or the total of the amounts paid during the income year in the case of a temporary incapacity income stream. It can include the proceeds of a life insurance death or TPD pay out.
Future service days is the number of days from the date of termination to the members last retirement day (generally age 65).
Total service days are the days from the member’s eligible service date to the day of termination.
Our Alliance Partners have access to our free Future Service Benefit calculator which produces a detailed report in Word format for SOA purposes. A member’s typical summary result is;
Retirement Age 65
Date of Birth 1-3-1975
Date of Termination of Employment 1-5-2018
Eligible Service Date 1-5-2002
Benefit Amount $1,000,000
The future service benefit income tax deduction in this case is $577,104. At a 15% tax rate this is a real cash benefit of $86,565 in tax saved.
