Private ruling: Death benefit
Date of advice: 7 April 2017
Published: September 2017
Ruling period: For the year ended 30 June 20ZZ.
Date scheme commenced: 1 July 20YY

Ruling: Q1: Are the beneficiaries of the Estate of the Deceased considered to be death benefits dependants in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: The Deceased died intestate on a date in the 20XX-YY income year. In a certificate issued by the Relevant Court of State X in June 20YY, it confirms that administration of the Deceased's estate (the Estate) was granted by the Court to the Deceased's spouse, the sole Administrator. Prior to their death, the Deceased was a member of two complying superannuation funds. On a date in 20YY-ZZ, a superannuation death benefit was paid by Fund 1 to the trustee of the Deceased's Estate. On a later date in 20YY-ZZ, a further superannuation death benefit was paid by Fund 2 to the trustee of the Deceased's Estate. At the time of their death, the Deceased was married and had two surviving children, both aged under 18.

Relevant legislative provisions: 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 Paragraph 302-195(1)(a).

Reasons for decision: Summary: The Deceased died intestate during the 20XX-YY income year. In accordance with Section 302-195, the spouse of the Deceased, and their two children, both aged under 18, are treated as death benefit dependants for tax purposes in respect of the lump sum death benefits. Therefore the two superannuation death benefits are not assessable income and are not exempt income in the hands of the trustee of the Estate. As the death benefits are tax-free, the benefits are not included in the assessable income of the Estate for each income year the payments were made and each beneficiary will not be liable to pay income tax on each share of the benefit. | Detailed Reasoning - Detailed reasoning: Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to superannuation death benefits paid from complying superannuation funds after 1 July 2007, and governs the taxation treatment of superannuation lump sum death benefits received by death benefits dependants and non-dependants. The term 'death benefits dependant' is defined in subdivision 302. | Detailed Reasoning - Superannuation lump sum: 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. The table contained in subsection 307-5(1) of the ITAA 1997 identifies the different types of superannuation benefits. One such payment is a superannuation death benefit. A superannuation death benefit is described in Column 3 of the table in subsection 307-5(1) as including: A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. Prior to their death, the Deceased was a member of two complying superannuation funds. As a result of their death, superannuation death benefits were paid by the two schemes during 20YY-ZZ, in respect of the Deceased. The superannuation lump sum benefits were paid to the trustee of the Estate. The beneficiaries of the Estate are the Deceased's spouse and two children under 18. The Administrator of the Estate is the Deceased's spouse. The lump sum benefits were paid by the Scheme after the Deceased's death, because the Deceased was a fund member. Therefore the benefits are superannuation death benefits within the meaning of subsection 307-5(1) of the ITAA 1997. | Detailed Reasoning - Superannuation death benefits paid to the trustee of a deceased estate: Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the trustee of a deceased estate. 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. As the superannuation lump sum death benefits from the Scheme were made to the trustee of the Estate section 302-10 of the ITAA 1997 will apply. In accordance with subsection 302-10(2) 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 or persons otherwise intended to benefit from the deceased estate. This means that, where a dependant of the deceased receives or will receive part or all of a superannuation death benefit, the lump sum will be subject to tax as if it were paid to a dependant of the deceased, and the death benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(2) of the ITAA 1997). Similarly, where a person who is not a dependant receives or will receive part or all of a superannuation death benefit, the benefit will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(3) of the ITAA 1997). Superannuation death benefits will be treated concessionally if dependants of the deceased will benefit from the estate. Where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, the benefit is not assessable income and is not exempt income, that is, it is tax-free. | Detailed Reasoning - Death Benefits Dependant in relation to the superannuation death benefits: 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 of the ITAA 1997 defines the meaning of death benefits dependant and states: (1) 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 - Death benefits dependants of the Deceased: As the Estate received two superannuation lump sum payments from the two schemes because of the death of the Deceased, and as the beneficiaries will benefit from the lump sum death benefits paid by the Scheme in respect of the Deceased, subsection 302-195(1) of the ITAA 1997 treats the beneficiaries as the death benefits dependants of the Deceased. | Detailed Reasoning - The treatment of the superannuation lump sum death benefits paid to the Estate: The superannuation payments were paid by the two schemes to the Estate in the 20YY-ZZ income year. Section 302-60 of the ITAA 1997 provides that where a person receives a superannuation lump sum death benefit and the recipient was a death benefits dependant of the deceased, the superannuation lump sum is not assessable income and is not exempt income in the recipient's hands. It follows, therefore, that the recipient is not liable to pay tax on the superannuation lump sum death benefit. Therefore in accordance with subsection 302-10(2) of the ITAA 1997, the benefits are treated as superannuation death benefits to which section 302-60 applies and are not assessable income and are not exempt income in the hands of the Trustee of the Estate. Consequently, the payments paid by the two schemes to the Estate are not included in the assessable income of the Estate under subsection 302-10(2) of the ITAA 1997 and the benefits should not be included in the income tax return of the Estate. When the death benefits are paid to the beneficiaries by the Estate, the beneficiaries will not be liable to pay income tax on each beneficiary's share of the benefit, as each portion of the benefit will represent a distribution of the corpus of the Estate.