Private ruling: Superannuation death benefit
Date of advice: 1 September 2016
Published: October 2016
Ruling period: Income year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is the portion of the superannuation death benefit provided to the deceased's estate, which the Executors resolve to hold on the trust created in a clause of the deceased's will (Superannuation Proceeds Trust), non-assessable non-exempt income in accordance with subsection 302-10(2) and section 302-60 of the Income tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Is the portion of the superannuation death benefit provided to the deceased's estate, which the Executors resolve to pay directly to a Child , non-assessable non-exempt income in accordance with subsection 302-10(2) and section 302-60 of the ITAA 1997? | A2: Yes | Q3: Is a strict tracing of the actual death benefit received by the deceased's estate to the Superannuation Proceeds Trust or the Child required? | A3: No | Q4: If a monetary equivalent of a non-monetary superannuation death benefit will be held in the Superannuation Proceeds Trust or provided directly to a beneficiary, are the beneficiaries expected to benefit from the death benefit for the purposes of subsection 302-10(2) of the ITAA 1997? | A4: Yes

Relevant facts and circumstances: The Deceased died in 20XX aged over 60. The Deceased was the sole member of the Fund. The Fund was a self-managed superannuation fund A Company was the trustee of the Fund (the Trustee). The Deceased was the sole director of the Trustee. On the Deceased's death the superannuation fund was in pension phase. The total superannuation death benefit that was transferred to the Executors later in 20XX was primarily comprised of the following assets: a) a piece of real property (the Real Property) b) Other assets The Fund still exists and has a very minor balance in its bank account which is the result of interest being paid into the account after the payment of the death benefit. The Executors were granted probate during 20XX. The Deceased was survived by X children aged between 10 and 36 years at the date of the Deceased's death. Of the Deceased's children, only Y are death benefit dependants of the Deceased as at the date of their death. A Clause of the Deceased's Will permits his Executors, at their discretion, to pay any death benefit in any of three ways, which include a payment to a trust in accordance with a clause (ie the Superannuation Proceeds Trust) or a payment directly to a death benefits dependant in accordance with another. The Executors are expected to deal with the superannuation death benefit received in the following way: • Hold part of the superannuation death benefit on trust in accordance with a clause of the Will, i.e. in the Superannuation Proceeds Trust. The only permitted beneficiaries of that trust will be superannuation death benefits dependants. It is possible that at a future date the trustee may enter into resolutions to fix the interests of that trust, although this has not been determined yet. • As one of the death benefit dependants (the Child) is now over 18, the Executors are proposing to pay some of the death benefit directly to the Child. However, due to practical considerations, the Executors do not consider it appropriate to hold the Real Property in the Superannuation Proceeds Trust or transfer part of it to the Child. Instead, the Executors propose that the Real Property be substituted by other estate assets of the same monetary value to fund the payments to the Child and the Superannuation Proceeds Trust.

Relevant legislative provisions: Income tax Assessment Act 1997 section 302-10 | Income tax Assessment Act 1997 subsection 302-10(2) | Income tax Assessment Act 1997 section 307-5 | Income tax Assessment Act 1997 subsection 307-5(1) | Income tax Assessment Act 1997 subsection 307-5(4) | Income tax Assessment Act 1997 section 307-65 | Income tax Assessment Act 1997 section 307-70 | Income tax Assessment Act 1997 subsection 301-10(1) | Income tax Assessment Act 1997 subsection 302-10(2) | Income tax Assessment Act 1997 subsection 302-200(2) | Income tax Assessment Act 1997 section 302-60 | Income tax Assessment Act 1997 section 302-195 | Income tax Assessment Act 1997 subsection 302-195(1) | Income tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: The portion of the superannuation death benefit provided to the Deceased's estate, which the Executors resolve to hold on the trust created in a clause of the deceased's will (Superannuation Proceeds Trust), is non-assessable non-exempt income in accordance with subsection 302-10(2) and 302-60 of the Income tax Assessment Act 1997 (ITAA 1997) The portion of the superannuation death benefit provided to the Deceased's estate, which the Executors resolve to pay directly to the Child, is non-assessable non-exempt income in accordance with subsection 302-10(2) and 302-60 of the ITAA 1997 A strict tracing of the actual death benefit received by the deceased's estate to the Superannuation Proceeds Trust or the Child is not required in order for the proceeds to be non-assessable non-exempt income. If a monetary equivalent of the superannuation death benefit will be held in the Superannuation Proceeds Trust or provided to the son directly, the beneficiaries are expected to benefit from the superannuation death benefit in accordance with subsection 302-10(2) of the ITAA 1997. | Detailed Reasoning - Superannuation death benefits paid to the trustee of a deceased estate: Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997. A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1). A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) as: … A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. A superannuation death benefit must be paid as either: _ a superannuation lump sum; or _ a superannuation income stream. A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70. The deceased passed away in 20XX. Later in 20XX, assets totalling an Amount were transferred from the Fund to the estate. The payment was comprised of the following assets: a) the Real Property b) Other assets The payment outlined above is a superannuation benefit within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as the payment is made to the Executor of the Estate because the Deceased is a fund member. This benefit is a superannuation death benefit as defined in subsection 307-5(4). The superannuation benefit is a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997. | Detailed Reasoning - Application of section 302-10 of the ITAA 1997: Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to trustees of the deceased estates. Subsection 302-10(1) states: This section applies to you if: (a) you are the trustee of a deceased estate; and (b) you receive a superannuation death benefit in your capacity as trustee. Therefore, section 302-10 of the ITAA 1997 will apply to the Trustees of the Deceased's Estate in this case. Subsection 302-10(2) of the ITAA 1997 states: To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit: (a) the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and (b) the benefit is taken to be income to which no beneficiary is presently entitled. Subsection 302-10(3) of the ITAA 1997 states: To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit: (a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and (b) the benefit is taken to be income to which no beneficiary is presently entitled. Under subsection 302-10(2) of the ITAA 1997, where a dependant of the deceased receives or is expected to benefit from a part of a superannuation death benefit, the Trustee of the Estate will be subject to tax on that part of the death benefit as if the Trustee was a death benefits dependant of the deceased. However, the beneficiary is not presently entitled to the superannuation death benefit at the time, and the benefit therefore does not form part of his or her assessable income. According to section 302-60 of the ITAA 1997: A superannuation lump sum that you receive because of the death of a person of whom you are a death benefits dependant is not assessable income and is not exempt income. | Detailed Reasoning - 'Death Benefits Dependant' in relation to the Superannuation Death Benefit: Subsection 995-1(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195. Section 302-195 defines a death benefits dependant as follows: A death benefits dependant , of a person who has died, is: (a) the deceased person's spouse or former spouse; or (b) the deceased person's *child, aged less than 18; or (c) any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or (d) any other person who was a dependant of the deceased person just before he or she died. | Detailed Reasoning - Application of the law to the facts of the case: From the facts, the executors propose to deal with the death benefit in two ways. • A direct payment to the Child under a clause of the Will • A payment under a clause of the Will to the trustee of the "Superannuation Trust" established solely for the benefit of dependant beneficiaries under a clause of the Will. | Detailed Reasoning - Portion of the Death Benefit proposed to be paid to the Child: Currently, the Child does not fulfil the requirement of being "the deceased person's child, aged less than 18." However, Taxation Determination TD 2013/12 specifically states the following in relation to subsection 302-195(1) of the ITAA 1997: 4. This definition describes a range of possible relationships between a person and the deceased person. Paragraphs (c) and (d) require the relationship to which they refer to exist just before the deceased person died. However, paragraphs (a) and (b) do not refer to the time as at which a person's satisfaction of either of those paragraphs is tested. 5. On the basis that the definition of a 'death benefits dependant' relates to 'a person who has died', the relevant time as at which a person's satisfaction of either of paragraphs (a) or (b) of that definition is to be tested is logically related to the time the deceased person died. 6. It is the Commissioner's view that paragraphs (a) and (b) should be interpreted consistently with paragraphs (c) and (d) as testing a person's satisfaction of either of those paragraphs as at just before the deceased person died. 7. Therefore, the requirement in paragraph 303-5(1)(c) of the ITAA 1997 that 'you are a death benefits dependant' is satisfied by virtue of paragraph 302-195(1)(b) of the ITAA 1997 if the deceased person's child was aged less than 18 just before the deceased person died. The reasoning above is consistent with the wording of section 302-195, which is phrased using the past tense: "To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited…" Although the view in TD 2013/12 specifically applies to the operation of paragraph 303-5(1)(c) of the ITAA 1997, the reasoning used in relation to 302-195(1) of the ITAA 1997 is applicable to the current case. In view of this, as the Child was under 18 at the time of the Deceased death, the portion of the death benefit paid to the estate that the Child is expected to benefit from will be taxed in the hands of the estate in accordance with subsection 302-10(2) of the ITAA 1997. In other words, the portion that is proposed to be paid to the Child will be tax free in accordance with section 302-60 of the ITAA 1997. | Detailed Reasoning - Portion of the Death Benefit proposed to be paid to the Superannuation Trust: You have advised that a portion of the death benefit is proposed to be paid to the Superannuation Trust created under a clause of the Will. Although the trustees of the Superannuation Trust (same as the executors of the estate) are not death benefit dependants, subsection 302-10(3) does not apply. This is because the trustees of the Superannuation Trust are not "beneficiaries of the estate" who "have benefited, or may be expected to benefit" from the death benefit. Instead, the portion of the death benefit is held on trust for the children. These children are beneficiaries of the estate who may be expected to benefit from future distributions from the Superannuation Trust. In addition, they are death benefit dependants of the Deceased under paragraph 302-195(1)(b) of the ITAA 1997. Since the only beneficiaries of the Superannuation Trust are death benefit dependants of the Estate, the portion of the death benefit paid to the estate that will be paid to the Superannuation Trust will be taxed in the hands of the Estate in accordance with subsection 302-10(2) of the ITAA 1997. In other words, the portion that is proposed to be paid to the Superannuation Trust will be tax free in accordance with section 302-60 of the ITAA 1997. | Detailed Reasoning - Is a strict tracing of the actual death benefit received by the deceased's estate to the Superannuation Proceeds Trust or the son required?: The Commissioner is of the view that with respect to the arrangement you have outlined being that other estate assets (or proceeds of the sale of other estate assets) are used to fund the Superannuation Proceeds Trust and the payment to the Child, and those assets have a value equal to the value of the Real Property and other benefits transferred by the Fund to the Executors as a superannuation death benefit, the superannuation death benefit can be considered non-assessable non-exempt income in accordance with subsection 302-10(2) and section 302-60 of the ITAA 1997.