Private ruling: Taxation treatment of a superannuation death benefit
Published: January 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Can the lump sum superannuation death benefit received by the deceased estate be excluded from assessable income as the deceased had a terminal medical condition but was unable to withdraw the benefits prior to death? | A1: No. Issue 2 | Q2: If the lump sum superannuation death benefit cannot be treated as a terminal medical condition payment, can the trustee of the deceased estate distribute the majority of the untaxed element of the taxable component to the de facto spouse? | A2: No. Issue 3 | Q3: Is the amount of the death benefit to be distributed under the Will to a tax exempt entity exempt from tax in the hands of the Trustee of the deceased estate on the basis that a deduction cannot be claimed for the bequest? | A3: No

Relevant facts and circumstances: You are the legal personal representative for the deceased's Estate. The deceased died during the 2011-12 income year as the result of a terminal medical condition. In the 2011-12 income year, the Estate received a death benefit payment from a superannuation fund (the Fund) of which the deceased was a member. The 'PAYG Payment Summary - Superannuation Lump Sum' prepared by the Fund shows the death benefit, from which no tax was withheld, comprised of a: (a) Taxable component made up of a taxed element and an untaxed element; and (b) Tax-free component. A copy of the deceased's Will has been provided which states the deceased's intentions on how the Estate's monies, and all other real and personal estate of the deceased, as far as practicable and legally possible, are to be distributed to the beneficiaries named in the Will. The Will also details specific property and assets to be distributed to particular beneficiaries. In a specific clause of the Will it states the residue of the deceased's real and personal estate is to be proportionately distributed to beneficiaries who include: (a) the deceased's de facto spouse; (b) relatives of deceased; and (c) a medical facility (the Centre). You state that the relatives are non-dependants.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 101A(3) | Income Tax Assessment Act 1997 Subsection 30-15(2). | Income Tax Assessment Act 1997 Section 302-10. | Income Tax Assessment Act 1997 Subsection 302-10(2). | Income Tax Assessment Act 1997 Subsection 302-10(3). | Income Tax Assessment Act 1997 Subsection 302-60. | Income Tax Assessment Act 1997 Subsection 302-145(2). | Income Tax Assessment Act 1997 Subsection 302-145(3) | Income Tax Assessment Act 1997 Subsection 302-195. | Income Tax Assessment Act 1997 Section 303-10. | Income Tax Assessment Act 1997 Section 307-5(1). | Income Tax Assessment Act 1997 Section 307-5(4).

Reasons for decision: Summary: The Trustee of the deceased estate is taxed on the taxable component of the superannuation death benefit. The Trustee will pay tax only on the part of the benefit which is ultimately attributable to the non-dependant beneficiaries (i.e. the deceased's relatives and the bequest to the Centre). Therefore, in the income tax return lodged by the Trustee of the Estate for the 2011-12 income year, the only amounts of the death benefit that should be included as assessable income is the portion of the taxable component of the benefit which is attributable to the non-dependants. | Detailed Reasoning - Superannuation death benefit provisions: A superannuation death benefit is defined in subsection 307-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) as a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 describes a superannuation death benefit as: … A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. Further a superannuation death benefit must be paid as either: (a) a superannuation lump sum; or (b) a superannuation income stream. In this case, the deceased, who died in the 2011-12 income year, was a member of a superannuation fund (the Fund). Subsequent to the deceased's death, the benefits in the Fund were paid to the decease's Estate during the 2011-12 income year. As shown in the PAYG Payment Summary (the Payment Summary) the payment, which was classified as a death benefit, was paid as a lump sum and comprised: (a) Taxable component made up of a taxed element and an untaxed element; and (b) Tax-free component. In view of the above, the payment is a superannuation death benefit as defined in Column 3 of Item 1 of the table in subsections 307-5(1) and consequently a superannuation death benefit under subsection 307-5(4) of the ITAA 1997. As the benefit was made by the Fund the relevant provisions of Division 302 of the ITAA 1997 require examination to determine its tax treatment. Application of Subdivision 302-A of the ITAA 1997 As previously mentioned, the benefit in this case was made to the Estate and accordingly section 302-10 of the ITAA 1997 applies. Under section 302-10 of the ITAA 1997, the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with the taxation arrangements that would otherwise apply to the person/s intended to benefit from the estate. This means a superannuation death benefit paid to the trustee of an Estate is taxed in the hands of the trustee in the same way it would be taxed if paid directly to the beneficiary. That is, portions of the death benefit payment are subject to tax to the extent that the beneficiaries are dependants or non-dependants of the deceased. The tax-free component of a superannuation death benefit received by a trustee is not subject to tax, regardless of whether there are beneficiaries who are dependants or non-dependants. It is also clear that as beneficiaries are not presently entitled to a superannuation death benefit at the time it follows that the death benefit does not form part of the beneficiaries' assessable income (subsections 302-10(2) and 302-10(3) of the ITAA 1997 and subsection 101A(3) of the Income Tax Assessment Act 1936 (ITAA 1936)). Further, it should be noted that concessional tax treatment in relation to a lump sum superannuation death benefit (section 302-140 of the ITAA 1997), paid from the deceased's superannuation fund to the trustee of the deceased's Estate, only applies to the part of the benefit which is ultimately attributable to a 'death benefits dependant' of the deceased (as defined in Division 302-D of the ITAA 1997). | Detailed Reasoning - The Taxation Treatment of the Superannuation death benefit paid to the Estate: In this case the facts show that the superannuation death benefit made to the Estate will ultimately be distributed to a dependant beneficiary of the deceased (i.e. the de-facto spouse) and non-dependant beneficiaries (i.e. the deceased's relatives and a testamentary gift to a medical facility (the Centre)). As previously stated, the tax treatment of a death benefit paid directly to the trustee of a deceased estate is taxed in the same way it would have been taxed if the benefit was paid directly to a dependant or non-dependant beneficiary. Therefore it follows that distributions of a superannuation death benefit when ultimately made to beneficiaries should reflect their proportionate share of the components which comprise the superannuation death benefit, in this case, a taxable component (comprising taxed and untaxed elements) and a tax-free component. Further, it would be reasonably expected that, as the benefit forms part of the overall distribution made from the Estate, the portion of the benefit that is attributable to each beneficiary would be in accordance with the provisions of the Will on how their proportionate share of the Estate's corpus is to be distributed. In view of the above, whilst the Trustee can, subject to the provisions of the Will, determine the amounts each beneficiary will receive, the Trustee can't specify the components to be paid to each beneficiary as the components so paid are determined on a pro rata basis (as are the elements within the components). Accordingly, in this case, the Trustee cannot distribute to the de-facto spouse the majority of the untaxed element. As previously stated the concessional tax treatment for lump sum superannuation death benefits only relates to dependants of the deceased and does not extend to non-dependants. In other words, no tax liability applies to a dependant on his or her share of the death benefit and this is regardless of whether the payment is made directly to the dependant or paid to him or her as a distribution from the deceased's Estate. In this case, the Trustee of the Estate is not liable for tax on the part of the superannuation death benefit which will be distributed to the deceased's de facto spouse, who, as previously stated, was a dependant of the deceased. Accordingly, this part of the benefit paid to the dependant does not represent assessable income of the Estate. In relation to the other beneficiaries of the superannuation death benefit, the deceased's relatives and the Centre, who are non-dependants, their pro rated share of the benefit's taxable component represents assessable income of the Estate. The facts show the taxable component of the superannuation death benefit comprise taxed and untaxed elements. Accordingly, the rates of tax that apply to the non-dependants' share of the taxable component are: (a) in relation to the taxed element - a rate not exceeding 15%; and (b) in relation to the untaxed element - a rate not exceeding 30%. Further to the above, it should be noted the amounts when distributed from the Estate to the beneficiaries are not required to be shown in any of the beneficiaries' taxable incomes, because these amounts represent a distribution of corpus of the Estate. | Detailed Reasoning - Lump sum superannuation death benefit and terminal medical condition: In the facts it is noted that the deceased died as a result of a terminal medical condition and you raised the issue of whether the lump sum superannuation death benefit received by the trustee of the deceased estate can be excluded from assessable income. In subsections 303-10(1) and 303-10(2) of the ITAA 1997, which detail the conditions for lump sum superannuation payments to terminally ill members being tax-free, it is stated: 303-10(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. 303-10(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. The above subsections were inserted into Division 303 of the ITAA 1997 as a result of amendments contained in the Tax Laws Amendment (2008 Measures No.2) Act 2008 to make lump superannuation payments tax-free when paid to an individual member with a terminal medical condition. Further, the fact that the payment must be made to a person with a terminal condition is mentioned in paragraph 14.3 of Chapter 7 in the Revised Explanatory Memorandum - SEN to Tax Laws Amendment (2008 Measures No.2) Act 2008 which states: 14.3 These amendments provide that a superannuation lump sum paid from either a taxed or an untaxed source to a person with a terminal medical condition is tax free. Though the deceased died as result of a terminal condition, the facts of this case show the lump sum payment was made months after the deceased's death. Accordingly, the payment, a superannuation death benefit, cannot be viewed as a payment from the Fund to the deceased but as a payment of the deceased's benefits from the Fund to the Estate which will ultimately be distributed to the beneficiaries. As the benefit was not received by the deceased, the person with the terminal condition, section 303-10 of the ITAA 1997 does not apply in this case. As the benefit in this case was made after the deceased's death and it was paid to the Estate, the lump sum payment is not tax-free under section 303-10 of the ITAA 1997 nor any other provision under the legislation. | Detailed Reasoning - Gift made under the Will: It is noted that in the deceased's Will that a testamentary gift is to be made to the Centre. The gift to the Centre, which results in the Centre being one of the beneficiaries, is a proportional distribution of the residue of the deceased's real and personal estate which accordingly includes the superannuation death benefit. As previously stated, the Centre was not a dependant of the deceased and the trustee of the Estate is liable for tax on the amount of the death benefit which is distributed to the Centre to the extent of the Centre's share of the death benefit's taxable component. Notwithstanding the above, and the facts do not show the distribution to be a cultural bequest, it should also be noted the trustee of the Estate is precluded from claiming a deduction for the distribution made from the Estate to the Centre (this includes the whole distribution to the Centre) as subsection 30-15(2) of the ITAA 1997 states: A testamentary gift or contribution is not deductible under this section. In reference to 'this section' stated above, it relates to section 30-15 in Subdivision 30-A of the ITAA 1997 which deals with deductions for gifts or contributions. | Detailed Reasoning - Conclusion:: The income tax return lodged by the Trustee of the Estate for the 2011-12 income year should include as assessable income only the portion of the taxable component of the benefit which is attributable to the non-dependants. In accordance with subsections 302-145(2) and 302-145(3)of the ITAA 1997 the taxed and untaxed elements of the taxable component, attributable to the non-dependants, is taxed at rate not exceeding 15% and 30% respectively. Further, the amounts when distributed from the Estate to the beneficiaries are not required to be shown in the beneficiaries' taxable incomes, because these amounts represent a distribution of corpus of the Estate.

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