Contributions to a complying superannuation fund may come from
various sources and are not normally regarded as ordinary income of
the fund under the income tax law. They are essentially receipts of
capital. However, Division 295 of the Income Tax Assessment Act
1997 specifically provides that certain contributions made to a
fund, such as employer contributions and deductible member
contributions, are "assessable contributions". These
contributions are included in the assessable income of the fund and
subject to the contributions tax of 15%.
Generally, expenditure of a complying superannuation fund will
be deductible to the fund to the extent that it is incurred in
gaining or producing the assessable income of the fund and is not
of a capital nature.
Potential Detriment Payments
Under Division 295, where a superannuation fund makes a death
benefit payment, it may increase the payment to the amount that
would have been available if taxable contributions had not been
included in the assessable income of the fund and contributions tax
paid. The increased payment is called a "potential detriment
payment". The fund can then claim a tax deduction for the
potential detriment payment it makes. The deduction is available so
that the death benefit is not reduced as a result of the
The principles that apply to potential detriment payments are as
The payments are not compulsory. Some superannuation funds may
make potential detriment payments, but others will be unable to do
The potential detriment benefit is only payable in respect of
lump sum death benefits paid in favour of a dependant of the
deceased member, which obviously includes a spouse, children under
18 years, financial dependants and other persons with whom the
deceased member had an "inter dependency
Payment can be made direct to the beneficiaries or through the
deceased member's estate.
The potential detriment payment cannot exceed the actual
contributions tax levied against the deceased member's
For an accumulation fund, a trustee may choose to calculate the
potential detriment payment by either:
5.1 having the fund's auditor certify the amount that the death
benefit has been reduced by the contributions tax; or
5.2 applying a Taxation Office formula.
Self managed superannuation fund trustees need to work out how
to fund the potential detriment payment before they can claim a tax
deduction against other taxable income. The payment cannot be
sourced from another member's account, and therefore fund
reserves need to be established during the life of the fund to
enable the potential detriment payment to be made.
The superannuation fund can only claim a tax deduction in the
income tax year in which the potential detriment payment is
The potential detriment payment will always form part of a lump
sum death benefit taxable component.
Re-contribution of a superannuation benefit reduces the size of
the taxable component of the death benefit, which in turn reduces
the amount of the potential detriment payment.
What should you do?
With the growth in the contributions that have been made into
superannuation funds over the last few years, the potential
detriment benefit is a significant issue to consider in relation to
the payment of death benefits.
It is worthwhile checking with your fund to see whether
potential detriment payments can be made. For such payments to be
permissible, the fund must allow for them and there must be
reserves available to fund them. There must also be the power in
the Trust Deed for reserves to be created. If there are no such
powers, an amendment to the Deed may be appropriate.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).