Private ruling: Exempt current pension income
Date of advice: 14 May 2018
Published: July 2018
Ruling period: Income year ended 30 June 2015 | Income year ended 30 June 2016 | Income year ended 30 June 2017 | Income year ending 30 June 2018
Date scheme commenced: 1 July 2014

Ruling: Q1: Will the payments to be made by the trustee of the self-managed superannuation fund following the death of the sole member satisfy subregulation 995-1.01(3) of the Income Tax Assessment Regulations (ITAR 1997)? | A1: Yes.

Relevant facts and circumstances: Your client is the trustee of the Fund. The Deceased Member was the sole member of the Fund. During the 2015 the Deceased Member passed away. The Fund has a corporate trustee. The current directors of the corporate trustee are yourself and an adult child (Child X) of the Deceased Member. The directors are also the legal personal representatives of the Deceased Member’s estate (the estate). The assets of the Fund comprise of cash and shares. The Deceased Member was being paid a superannuation income stream up until the date of death. The Deceased Member did not have a reversionary pension. The Deceased Member did not have in place any binding or non-binding death benefit nomination. The Deceased Member did not have a will. The Deceased Member is survived by a spouse and several adult children from prior marriages During 2015 you met with the Deceased Member’s surviving spouse and another family member to discuss who would be suitable or appropriate to apply for a grant of representation. In 2015 you and Child X were appointed legal personal representatives of the estate. The Fund’s Trust Deed (the Deed) directs the Trustee to pay a death benefit for the benefit of dependants of the deceased member or to the legal personal representatives of the deceased member, when the Trustee does not hold a beneficiary nomination. The Deed further states that if after reasonable inquiry the Trustee determines that the deceased member left no dependants or that there are no Dependants whose existence, identity and whereabouts are satisfactorily known to the Trustee and the Trustee is unable to locate any legal personal representative of the deceased member, then the death benefit will be transferred to the Reserve Account of the Fund. In the Deed, ‘Dependant’ is defined, and includes a spouse, child, a person who is wholly or partially dependent on the member for that person's maintenance and support, or a person in an interdependency relationship with the member. The Deceased Member has several children. The eldest child is from the Deceased Member’s first marriage. The other children are from the Deceased Member’s second marriage. The Deceased Member was estranged from their children and prior to death was unable to say whether or not one of the children (the Child) was living and was imprecise about the nature of the child’s circumstances or the extent of their disabilities. Investigations and enquiries were made to locate the Child for the purpose of determining whether or not they had survived the Deceased Member. Following enquiries made by family members, you were provided with a contact number for a person believed to be the Child’s other parent (the Parent). You spoke with the person believed to the Parent by telephone and discussed the Child and their disability. You also advised that you would formally require some evidence of the Child’s identity and disability and any paperwork regarding a Power of Attorney or Tribunal Order concerning the appointment of any personal representative. Documents and emails have been provided in relation to the attempts and delays encountered over the years in obtaining appropriate material from the Parent and the legal representative to verify the identity of the Child and the Parent, together with material regarding the Child’s disability and any authority to act material such as guardianship or administration orders. In 2017, you requested a private investigator to investigate matters of the estate of the Deceased Member, namely confirm the identity and condition of the Child thought to be a child of the Deceased Member. The private investigator provided a report which confirmed the identity of the Child and their disability. There have been no payments made from the Fund since the death of the Deceased Member except for the Fund’s expenses.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subdivision 295-F | Income Tax Assessment Regulations 1997 Regulation 995-1.01 | Income Tax Assessment Regulations 1997 Subregulation 995-1.01(3 )

Reasons for decision: Summary: Given the facts presented the payments will be regarded as having been made ‘as soon as it was practicable’ following the Deceased Member’s death. As subregulation 995-1.01(3) of the ITAR 1997 has been satisfied, the payments to be made by the Fund following the Deceased Member’s death will be taken to be payments of superannuation income stream benefits. | Detailed Reasoning - Detailed reasoning: Superannuation Income Stream Benefit Income that a complying superannuation fund derives from assets set aside or used to pay superannuation income stream benefits to members, which would otherwise be assessable income, is deemed to be exempt income where the conditions in subdivision 295-F of the Income Tax Assessment Act 1997 (ITAA 1997) are satisfied for an income year. Such income is commonly referred to as exempt current pension income (ECPI). The ITAA 1997 defines ‘superannuation income stream benefit’ with reference to the ITAR 1997. The meaning of superannuation income stream benefit is set out in regulation 995-1.01. Subregulation 995-1.01(3) of the ITAR 1997 provides: (3) For the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act, if: (a) a superannuation death benefit that is a superannuation lump sum is paid after the death of a person (the deceased ) using only an amount from a superannuation interest; and (b) immediately before the deceased's death, the superannuation interest was supporting a superannuation income stream payable to the deceased; and (c) the superannuation income stream did not automatically revert to another person on the death of the deceased; the amount paid as the superannuation lump sum, to the extent it is not attributable to any amount (other than investment earnings) added to the superannuation interest on or after the deceased's death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased's death until as soon as it was practicable to pay the superannuation lump sum. In other words, where a death benefit is paid using only an amount from the deceased’s interest that previously supported a pension (and the interest was not reversionary) then the payment will be considered a payment of the original income stream benefit. This is on the condition that no other amounts (apart from investment earnings) have been added to the superannuation interest following the member's death, as is the case here. However, the payment will only be a superannuation income stream benefit for the period between the member’s death and ‘as soon as it was practicable to pay the superannuation lump sum.’ The Explanatory Statement to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (the ES) gives an example which explains this. Example 3 of the ES states: Arthur was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 September 2012. The income stream did not automatically revert to another person on Arthur's death and no amounts (other than investment earnings) were added on or after his death to the superannuation interest that was supporting the income stream. After undertaking a claims staking process, the trustee of the fund determined that the entire value of the deceased member's benefits in the fund would be paid to the deceased's widow as a lump sum. On 20 December 2012, which was in the circumstances as soon as practicable after Arthur's death, a single lump sum of $100,000 was paid to the widow using only an amount from the relevant superannuation interest. For the purposes of the earnings tax exemption, the $100,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2012 until 20 December 2012. The words ‘as soon as it was practicable’ are not defined in the income tax legislation. The Oxford English Dictionary defines ‘practicable’ as meaning ‘able to be done or put into practice successfully’. The Australian Macquarie Dictionary defines the term as ‘capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible’. The ES provides a number of examples of where, notwithstanding delay, the payment of a superannuation death benefit will be made ‘as soon as it was practicable’ after a member's death. In this case, the Fund is a single member self-managed superannuation fund. Prior to the Deceased Member’s death, the Fund was supporting a superannuation income stream payable to the Deceased Member. The superannuation income stream did not revert to another person on the death of the Deceased Member. Accordingly, as shown in the Fund’s Trust Deed (the Deed), a Deceased Member’s benefits must, where there is no binding nomination, be applied to or for the benefit of the dependants of the deceased member or the legal personal representatives of the deceased member. The Deed further states that if after reasonable inquiry the Trustee determines that the deceased member left no dependants or that there are no Dependants whose existence, identity and whereabouts are satisfactorily known to the Trustee and the Trustee is unable to locate any legal personal representative of the deceased member, then the death benefit will be transferred to the Reserve Account of the Fund. Accordingly, in line with the Deed it was necessary for the purposes of paying out the Deceased Member’s benefits from the Fund to locate the dependants of the Deceased Member and that there be reasonable enquiry to determine if there were any dependants. In this case you have provided details and documentation that the delay in payment has been due to investigations and enquiries made by the Trustee of the Fund and the administrators of the Deceased Member’s estate to identify and locate the Child for the purpose of determining whether or not that child had survived the Deceased. In late 2017, you received material to verify the identity of the Child as well as material regarding their disability and the authority to act. In conclusion, given the circumstances following the Deceased Member’s death, the payments in this case may be considered as being made ‘as soon as it was practicable’. In this case, subregulation 995-1.01(3) of the ITAR 1997 has been satisfied. Therefore, the payments to be made by the Fund following the Deceased Member’s death will be taken to be superannuation income stream benefits for the purposes of claiming ECPI under subdivision 295-F of the ITAA 1997.