I posted this article over a year ago but, now that our Toolbox calculates the numbers automatically for you, I thought it was worth repeating. It is also of interest as it provides an income tax deduction which will soak up excess imputation credits that would otherwise be lost if Labor win the election and make their promised change.
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.
We have made a reasonable assessment of eligibility and selected age ranges from 25 to 64 for our Toolbox analysis.
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.
Our Toolbox analysis calculates the potential deduction for funds with members covered by life insurance.
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.
Our Toolbox provides the deduction generated if members in the selected age range hold $1 of insurance cover. If the result is of interest to you then the Toolbox also provides a calculator for you to model your required sum insured.
Caution must be exercised as, though holding an insurance policy 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.
Our Toolbox shows the untaxed element amount that would be generated in each circumstance so that you may tailor your advice accordingly.
A typical deduction generated for a fund with an eligible member 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 or excess imputation credits utilised.
