Private ruling: Superannuation death benefit
Published: June 2012
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Will any part of the pension payment made by the deceased estate to the dependent spouse be tax-free for income tax purposes? Answer: Yes.

Relevant facts and circumstances: A complying superannuation fund (the Fund) was established in the 2002-03 income year with two married members. In the 2002-03 income year, one of the members, spouse A, started to receive an annual pension (the pension) from the Fund. The pension, which is non reversionary, was: · a type detailed in subregulation 1.06(7) of the Superannuation Industry (Supervision) Regulations 1994; and · a defined benefit pension for a fixed term. In the 2010-11 income year, spouse A, hereafter referred to as the deceased, passed away. The member balances in the Fund for the deceased and the surviving spouse at the date of death have been provided. A copy of the Actuarial Report (the Report) which was prepared in relation to the Fund for the 2011-12 income year has been provided. In the Report, it stated amongst other matters that the in accordance with section 10 of the Superannuation Industry (Supervision) Act 1993 and the definitions in Regulation 1.03 of the Superannuation Industry (Supervision) Regulations 1994, the Fund is a defined benefit fund as it has at least one member who was being paid a defined benefit pension. A copy of the Fund's Trust Deed (the Deed) has been provided which states amongst other matters that the trustee must pay death benefits by way of a lump sum or a pension to the deceased member's legal estate or their dependants in such proportions and such manner as the trustee sees fit unless a binding death benefit nomination or death benefit rule is operative. The Fund intends to pay the deceased's annual defined benefit pension into the deceased's estate (the Estate) and subsequently distribute the pension amount to the beneficiary, the surviving spouse. The Fund intends to cease paying the pension into the Estate on the date when the pension expires. The deceased was over 60 years of age as is the surviving spouse. Neither of the members were working in the 2011-12 income year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 4-5 | Income Tax Assessment Act 1997 Division 302 | Income Tax Assessment Act 1997 Section 302-10 | Income Tax Assessment Act 1997 Section 302-65 | Income Tax Assessment Act 1997 Section 302-70 | Income Tax Assessment Act 1997 Section 302-80 | Income Tax Assessment Act 1997 Section 302-85 | Income Tax Assessment Act 1997 Section 302-195(1) | Income Tax Assessment Act 1997 Section 307-5 | Income Tax Assessment Act 1997 Subsection 307-5(1) | Income Tax Assessment Act 1936 Subsection 101A(3) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 1.06(7) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(2) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(2A) | Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(3)

Reasons for decision: Summary: The payments from the superannuation fund (the Fund) represent a 'superannuation death benefit' which in this instance can be paid to the Trustee of the Estate as a superannuation income stream (income stream) to be distributed under the terms of the Estate. As the beneficiary of the income stream is over 60 years of age, and a death benefits dependant, the income stream is tax-free and not assessable income and not exempt income to the extent that the income stream does not include an untaxed element in the Fund. | Detailed Reasoning - Superannuation death benefit - income stream benefits: The table in subsection 307-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) lists the various types of superannuation benefits. Item 1, column 2 of the table defines a 'superannuation benefit' as being: · A payment to you from a superannuation fund because you are a fund member. In this case it is evident that the pension payments (the payments) from the superannuation fund (the Fund) arise from the deceased having been a member of the Fund. Item 1, column 3, of the table in subsection 307-5(1) of the ITAA 1997 specifies that a superannuation fund payment is a superannuation death benefit if it is: · A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. Section 4-5 of the ITAA 1997 defines the expression 'you' to apply to entities generally unless the application is expressly limited. Therefore 'a payment to you', as specified in subsection 307-5(1) of the ITAA 1997, can refer to a payment to a trustee of a deceased estate. Based on the table in section 307-5(1) of the ITAA 1997 the payments to the deceased's estate satisfy the definition of a 'superannuation death benefit'. This is because they are paid to the deceased's estate from a superannuation fund after the deceased's death and the deceased was a fund member. From 1 July 2007 the form in which a deceased member's benefit may be taken is restricted by subregulations 6.21(2) and (3) of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Further, under subregulation 6.21(2A) of the SISR, a deceased member's benefits may only be taken in the form of a pension or annuity if, at the time of the member's death, the recipient is: · a dependant of the member; and · in the case of a child of the member: · is less than 18 years of age; or · if more than 18 years and is less than 25 years and financially dependent on the deceased member or has a disability as described in the Disability Services Act 1983 . In this case, the beneficiary of the Estate is the deceased's spouse and accordingly a dependant of the deceased for purposes of the SISR. Therefore, the deceased's benefits may be cashed out in the form of a single lump sum or a pension (which is also stated in the Fund's Trust Deed (the Deed)). In the Deed it also details what must happen on the death of a member and it specifically states that subject to meeting the standards set out in the SIS Regulations, the Trustee may continue to pay any Pension previously payable to a member to the Legal Personal Representative of the member. In view of the above and the SISR requirement being satisfied, it is considered that in your client's case the non-reversionary income stream can be transferred to the Trustee of the Estate (that is, the legal personal representative of the deceased member) and subsequently be distributed under the terms of the Estate. | Detailed Reasoning - Taxation treatment of superannuation death benefits - income stream benefits: Division 302 of the ITAA 1997 sets out the taxation arrangements that apply to the payment of superannuation death benefits. These arrangements depend on whether the person who receives the superannuation death benefit is a death benefits dependant of the deceased or not; and whether the amount is paid as a superannuation lump sum death benefit or a superannuation income stream death benefit. Subsection 302-195(1) of the ITAA 1997 defines death benefits dependant and included in that definition is the deceased person's spouse or former spouse. In this case, the beneficiary is a death benefits dependant for tax purposes as the beneficiary was the deceased's spouse. In view of the above and the facts provided, the superannuation death benefits, in this case paid in the form of an income stream, are ultimately paid to a dependant beneficiary. Further the facts show that the income stream from the Fund will be paid directly to the Estate and continue to be paid to the Estate until the income stream's expiry date. | Detailed Reasoning - Death benefit payments made to the Trustee of the Estate: In accordance with subsection 101A(3) of the ITAA 1936 the death benefits paid directly to the Trustee of an Estate should be disclosed the Estate's annual income tax returns which are lodged by the Trustee of the deceased Estate. In relation to how death benefits made to an estate are treated section 302-10 of the ITAA 1997 states: 302-10(1) 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. 302-10(2) 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. … The effect of the above is that where a death benefit is paid to the Trustee of a deceased estate, and there are dependant beneficiaries, the extent to which the benefits are assessable and taxed are determined by reference to sections 302-60 to 302-90 of the ITAA 1997 which deal with death benefits to dependants. In this case sections 302-65 and 302-85 of the ITAA 1997 are of relevance as the death benefit is: · an income stream benefit; and · the beneficiary is a death benefits dependant who was over 60 years of age. The effect of section 302-65 of the ITAA 1997 is that the income stream benefit is not assessable income and not exempt income. However, if the income stream benefit includes an element which was untaxed in the Fund: · the untaxed element in the income stream benefit represents assessable income of the Estate (subsection302-85(1)of the ITAA 1997) which is taxed at marginal rates (section 302-80); and · a tax offset of 10% applies in relation to the untaxed element in the income stream benefit. Further, it should be noted that as the income stream benefit is paid directly to the Trustee of the Estate, no Medicare levy or Medicare levy surcharge is applicable. The amount of the income stream benefits when distributed from the Estate to the beneficiary are not required to be shown as taxable income in the beneficiary's annual income tax returns because those amounts represent a distribution of the corpus of the estate. | Detailed Reasoning - Conclusion: The income stream benefits payable to the Trustee of the Estate are tax-free and do not represent assessable income unless the benefit includes an element which was untaxed in the Fund. If an untaxed element forms part of the income stream benefit, that element in the benefit represents assessable income on which the Trustee is liable for tax and entitled to 10% tax offset.

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