Private ruling: Superannuation benefits
Date of advice: 17 July 2015
Published: July 2015
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the superannuation lump sum received by the Deceased's estate considered to be a terminal illness payment under section 303-10 of the Income Tax Assessment Act 1997 ? | A1: No. | Q2: Is the superannuation lump sum received by the Deceased's estate considered to be a death benefit payment? | A2: Yes.

Relevant facts and circumstances: The Deceased passed away in the 2014-15 income year. The Deceased held an account with an Australian superannuation fund (the Fund). The applicant provided medical certificates from more than two medical practitioners (including a specialist) issued during the 2013-14 income year. These medical certificates state that the Deceased had an estimated life expectancy of less than 12 months. During the 2013-14 income year, the Deceased completed an Application for issue of invalidity retirement certificate , which they submitted to their Fund in order to redeem their superannuation account. It is stated on the Contributing Exit Statement provided from the Fund that the Deceased ceased to be a member of the Fund in the 2013-14 income year. However, they continued to hold equity in the Fund which ceased in the 2014-15 income year. In the 2014-15 income year, the Fund made a lump sum payment directly into the Deceased's estate. In a letter dated in the 2014-15 income year, a customer information representative from the Fund stated that because the Deceased provided evidence that they were terminally ill, the benefit was paid as a tax free lump sum and no payment summary is available.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 303-10 | Income Tax Assessment Act 1997 Section 307-5 | Income Tax Assessment Act 1997 Section 307-65 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Assessment Regulations 1997 Regulation 303-10.01 | Superannuation Industry (Supervision) Regulations 1994 Paragraph 6.17(2)(a)(i). | Superannuation Industry (Supervision) Regulations 1994 Paragraph 6.17(2)(a)(ii). | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.18(1). | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.18(3). | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.20(3) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.20(4)

Reasons for decision: Summary: The payment made by the Fund to the Deceased's estate is not considered to be a Superannuation lump sum member benefit paid to a member having a terminal medical condition. The lump sum is considered to be a superannuation death benefit and is subject to the taxation arrangements that apply to the payment of superannuation death benefits under Division 302 of the ITAA 1997. | Detailed Reasoning - Terminal illness payment: Section 303-10 of the ITAA 1997 sets out the tax treatment of a superannuation lump sum member benefit paid to members having a terminal medical condition. Section 303-10 of the ITAA 1997 states: (1) This section applies to a *superannuation member benefit that: (a) is a *superannuation lump sum; and (b) is: (i) paid from a *complying superannuation plan; or (ii) a *superannuation guarantee payment, a *small superannuation account payment, an *unclaimed money payment, a *superannuation co-contribution benefit payment or a *superannuation annuity payment. (2) The lump sum is not assessable income and is not exempt income if a terminal medical condition exists in relation to you when you receive the lump sum or within 90 days after you receive it. In accordance with subsection 307-5(1) of the ITAA 1997, a superannuation member benefit is a payment to a person from a superannuation fund because the person is a fund member. A superannuation lump sum is defined in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit. Subsection 995-1(1) of the ITAA 1997 defines ' terminal medical condition ' to have the meaning given by the regulations. In accordance with regulation 303-10.01 of the ITAR 1997, a terminal medical condition exists in relation to a person at a particular time if: (a) two registered medical practitioners have certified, jointly or separately, that the person suffers from an illness, or has incurred an injury, that is likely to result in the death of the person within a period (the certification period ) that ends not more than 12 months after the date of the certification; (b) at least one of the registered medical practitioners is a specialist practising in an area related to the illness or injury suffered by the person; (c) for each of the certificates, the certification period has not ended. In this case, more than two registered medical practitioners (one of whom is a specialist practicing in the area related to the Deceased's illness) have certified, that the Deceased suffers from an illness that is likely to result in the death of the Deceased within twelve months after the date of the certification. However, the lump sum was not received directly by the Deceased, but rather it was paid into their estate after the Deceased's death. Furthermore, it can be said that at the time the payment was made the Deceased was not suffering from a terminal medical condition as they had already passed away. Whilst the above paragraph would indicate that the lump sum payment would not satisfy the requirements of Section 303-10 of the ITAA 1997, we will nonetheless consider its interaction with the Superannuation Industry (Supervision) Regulations 1994 (SISR). Payments made from superannuation funds are required to meet the requirements of Part 6 of the SISR, which are also known as the payment standards. Paragraph 6.17(2)(a)(i) of the SISR provides that: A member's benefits in a fund: (a) may be paid: (i) by being cashed in accordance with Division 6.3; or (ii) by being rolled over or transferred in accordance with Division 6.4, 6.5 or 6.7; or (iii) by being allotted under Division 6.7; and (b) must not be paid in that way except when, and to the extent that, the fund is required or permitted under this Part to pay them; and (c) must be paid in that way when, and to the extent that, the fund is required under this Part to pay them. Paragraph 6.18(1) in Division 6.3 of the SISR provides that "… a member's preserved benefits in a regulated superannuation fund may be cashed on or after the satisfaction by the member of a condition of release…". Paragraph 6.18(3) provides that the form in which preserved benefits may be cashed is a form specified in Schedule 1 as a cashing restriction relating to the condition of release, or if the specified cashing restriction is "Nil", then as one or more lump sums, one or more pensions or the purchase of one or more annuities. Subregulation 6.20(3) provides a similar rule for unrestricted non-preserved benefits. The Conditions of release are provided for in Schedule 1 of the SISR. The relevant condition of release in the current case is item 102A of the table contained in Schedule 1 of the SISR, which has a cashing restriction of 'Nil'. As noted from the above, preserved and restricted non-preserved benefits may be cashed if any of the prescribed conditions of release are satisfied, subject to any cashing restrictions associated with the conditions of release. In this instance, the condition of release satisfied by the Deceased prior to their death was that of a terminal medical condition. Where a condition of release with no cashing restriction is satisfied, the benefits in the fund at the time of satisfying the condition of release become unrestricted non-preserved benefits. Subject to a fund's governing rules and Regulation 6.20 of the SISR, unrestricted non-preserved benefits may be cashed at any time. However, the lump sum payments must not be paid later than the time when a member's benefit must be compulsory cashed (Subregulation 6.20(4) of the SISR). Accordingly, at the time of death the lump sum payment had not been paid. As such it has not been considered to have been cashed at that point in time. Upon the death of the Deceased, their benefits in the Fund are required to be compulsory cashed as soon as practicable in accordance with Regulation 6.21 of the SISR. As a voluntary cashing of unrestricted non-preserved benefits cannot be cashed after the time when a member's benefit must be compulsory cashed, it is considered that the lump sum payment made to the estate is not a superannuation lump sum member benefit paid to member having a terminal medical condition. | Detailed Reasoning - Superannuation death benefit: Subsection 995-1(1) of the 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. In the current case the Deceased passed away in the 2014-15 income year. The Deceased's entire benefits in the Fund were paid in the form of a superannuation lump sum to their estate during the 2014-15 income year. Whilst the contributing exit statement provided by the Fund indicates that the Deceased ceased to be a member of the Fund in the 2013-14 income year, it also states that the Deceased continued to hold equity in the Fund which ceased on the date the superannuation lump sum was paid. It is contended that the superannuation lump sum payment received by the estate was made by the Fund, after the Deceased's death because they were a member of the Fund. Accordingly, the payment is considered to be a superannuation death benefit and is subject to the taxation arrangements that apply to the payment of superannuation death benefits under Division 302 of the ITAA 1997.