Private ruling: Transfer balance cap
Date of advice: 6 October 2020
Published: February 2018
Ruling period: Income year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Is the superannuation benefit paid to a deceased estate to be included in the assessable income of the estate? | A1: Yes

Relevant facts and circumstances: The spouse of a person (the Deceased) died. The spouse of the Deceased was a member of a superannuation fund (the Fund) and was the recipient of a superannuation income stream. When the Deceased’s spouse died, their pension reverted to the Deceased. Less than a month later, the Deceased died. The Deceased was also a member of the Fund. The Fund’s trust deed states that where a nominated person dies within 30 days of the death of the pensioner, the pension is commuted and paid to the estate of the reversionary. The trustee for the Estate received a death benefits lump sum payment The Deceased was a death benefits dependant of their spouse. The beneficiaries of the Estate are non-dependant beneficiaries of the Deceased.

Relevant legislative provisions: 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 Section 302-10. | Income Tax Assessment Act 1997 Subsection 302-10(1). | Income Tax Assessment Act 1997 Subsection 302-10(2). | Income Tax Assessment Act 1997 Subsection 302-10(3). | Income Tax Assessment Act 1997 Section 302-140. | Income Tax Assessment Act 1997 Section 302-145 | Income Tax Assessment Act 1997 Section 302-195. | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: A payment made by a superannuation fund to a deceased estate after the death of the deceased is assessed as a death benefit under section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997). In this case, the death benefit is treated as if it had been paid to a person who was not a death benefits dependant of the deceased. As the trustee for the Deceased’s Estate has received a superannuation death benefit payable, the benefit is taken to be income to which no beneficiary is presently entitled and the trustee is liable to pay tax on that income. When an amount is ultimately distributed to non-dependant beneficiaries, it is an amount of capital and is not assessable income. | Detailed Reasoning - Superannuation death benefits: 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) of the ITAA 1997. A superannuation death benefit is described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997 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 of the ITAA 1997. The Deceased was a death benefits dependant of their spouse and the spouse’s pension should have reverted to the Deceased. However, as the Deceased died within 30 days of their spouse, the pension was commuted to a lump sum and paid to the Deceased’s estate. The benefit was made to the Deceased’s Estate during the 2014-15 income year from the Fund after the Deceased’s death, because the Deceased was a member of the Fund. Hence, this payment 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. This benefit is a superannuation death benefit as defined in subsection 307-5(4) of the ITAA 1997. The superannuation benefit is a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997 and the provisions of Division 302 of the ITAA 1997 apply to the benefit. | Detailed Reasoning - Death benefit paid to the trustee of a deceased estate: Subsection 302-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that: To the extent that 1 or more beneficiaries of the estate who were death benefits dependents of the deceased have benefited, or may be expected to benefit, from the * superannuation death benefit: (a) the benefits is treated as if it had been paid to you as a person who was a death benefits dependent of the deceased; and (b) the benefit is taken to be income to which no beneficiary is presently entitled. *To find the definition of asterisked terms, see the Dictionary, starting at section 995-1. Thus where a death benefits dependent receives or will receive all or part of a superannuation death benefit payment, the trustee will be subject to tax on that part of the benefit paid or to be paid to the dependent as if it had been paid to that beneficiary. However, the dependent beneficiary is not presently entitled to the payment and the benefit does not form a part of their assessable income 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 dependent s 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 dependent of the deceased; and (b) the benefit is taken to be income to which no beneficiary is presently entitled. *To find the definition of asterisked terms, see the Dictionary, starting at section 995-1. Where a non- dependent beneficiary receives or will receive all or part of a superannuation death benefit payment, the trustee will be subject to tax on that part of the benefit paid or to be paid to the dependent as if it had been paid to that beneficiary. However, the dependent beneficiary is not presently entitled to the payment and the benefit does not form a part of their assessable income. In this instance, while the Deceased was a death benefits dependant of their spouse, they were not a beneficiary who has benefited, or may be expected to benefit, from the superannuation death benefit. The Deceased prior to the death benefit payment being made. As the Deceased’s death pre-dates the superannuation death benefit, it is impossible for the Deceased to benefit from it. Consequently, subsection 302-10(2) of the ITAA 1997 does not apply. Instead, as the beneficiaries of the Deceased’s estate are non-dependant beneficiaries, the death benefit payment should be taxed in accordance with subsection 302-10(3) of the ITAA 1997. | Detailed Reasoning - Tax treatment of a death benefits payment made to a non-dependent beneficiary: Section 302-140 of the ITAA 1997 provides that the tax free component of a superannuation death benefit payment received by a non-dependent is not assessable income and is not exempt income. In relation to the taxable component of a death benefit payment, section 302-145 of the ITAA states the following: (1) If you receive a superannuation lump sum because of the death of a person of whom you are not a *death benefits dependent, the *taxable component of the lump sum is assessable income. Note: For taxable component , see Subdivision 307-C (2) You are entitled to a *tax offset that ensure that the rate of the incom e tax on the *element taxed in the fund of the lump sum does not exceed 15% (3) You are entitled to a *tax offset that ensure that the rate of the income tax on the *element taxed in the fund of the lump sum does not exceed 30% *To find the definition of asterisked terms, see the Dictionary, starting at section 995-1. Consequently, the taxable component of the lump sum payments made by the Fund will be taxed as per the above rates. The taxable components of the payments must be disclosed in the income tax return of the Estate. Once the payment is made from the Estate to the relevant beneficiary, it will not need to be included as assessable income in that beneficiary’s tax return as the payment represents a distribution of the Estate.