Private ruling: Superannuation member benefit or death benefit
Date of advice: 9 June 2023
Published: 31 July 2023
Ruling period: Income year ending 30 June 2022
Date scheme commenced: 1 July 2021

Ruling: Q1: Is the full commutation of the Late X (the Member)'s pension phase account to the amount of $X,XXX,XXX that was requested shortly before their death on X XX 2022 but received around 28 weeks after the death on X XX 20XX, a superannuation member benefit or superannuation death benefit? | A1: The full commutation of the Member's pension phase account was a superannuation death benefit.

Relevant facts and circumstances: 1. The member was over 65 years old at the date of their death on X XX 20XX (the Date of Death). 2. The Member held one superannuation account with their superannuation fund (an SMSF fund): Table 1: Member held one superannuation account with their superannuation fund Superannuation account Withdrawal benefit Account phase Account based pension $X,XXX,XXX Pension phase 3. The Member had no death benefits dependants for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997). 4. The Member lacked legal capacity. As a result, on X XX 20XX the relevant state government authority made an order appointing the Member's brother, administrator of the Member's estate (the Administrators). The order gave the Administrator all the powers and duties to make decisions about the financial matters of the represented person specified in the order. 5. In 2022 the Administrator decided to fully commute the Member's account-based pension to the member's personal bank account. 6. Accordingly, the Administrator (the Administrator) completed a withdrawal and account closure form for the Member's account-based pension. The Administrator requested payment of the superannuation benefits into the Member's personal bank account. 7. The Administrator submitted the form to the Member's superannuation fund in the afternoon of the Date of XX and received an acknowledgment email from the fund shortly after that, on that day, before the death of the member. 8. The Member then unexpectedly died X XX 20XX. 9. The fund's financial advisor was notified of the member's passing on X XX 20XX. 10. The trustee of the Member's superannuation fund ultimately paid the final withdrawal benefit of $X,XXX,XXX from the Member's pension phase account into the Member's personal bank account around twenty eight weeks after the Date of Death.

Relevant legislative provisions: Division 301 of the Income Tax Assessment Act 1997 | Division 302 of the Income Tax Assessment Act 1997 | Section 307-5 of the Income Tax Assessment Act 1997 | Section 307-65 of the Income Tax Assessment Act 1997 | Section 307-70 of the Income Tax Assessment Act 1997 | Subsection 995-1(1) of the Income Tax Assessment Act 1997 | Regulation 307-70.01 of the Income Tax Assessment (1997 Act) Regulations 2021 | Regulation 307-70.02 of the Income Tax Assessment (1997 Act) Regulations 2021 | Regulation 1.06 of the Superannuation Industry (Supervision) Regulations 1994 | Regulation 6.12 of the Superannuation Industry (Supervision) Regulations 1994 | Regulation 6.20 of the Superannuation Industry (Supervision) Regulations 1994 | Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 Schedule 1 to the Table in Part 1 of the Superannuation Industry (Supervision) Regulations 1994

Reasons for decision: Detailed Reasoning - Legislative framework: 11. The Member was over 65 years old at the date of their death. This meant the member had already satisfied the condition of release in Schedule 1, item 106 of the table in Part 1 of the Superannuation Industry (Supervision) Regulations 1994 (SISR) by reaching the age of 65 years. This condition of release has 'nil' cashing restrictions. Under regulation 6.12 of the SISR, the member's benefits were all converted to unrestricted non-preserved benefits upon meeting a condition of release with 'nil' cashing restrictions. Under subregulation 6.20(1) of the SISR, a member's unrestricted non-preserved benefits in a regulated superannuation fund may be voluntarily cashed at any time. As per subregulations 6.20(2) and (3) of the SISR the whole or a part of the member's unrestricted non-preserved benefits may be cashed as one or more lump sums or one or more pensions. 12. The Member's death on X XX 20XX then resulted in their meeting the condition of release in Schedule 1, item 102 of the table in Part 1 of the SISR. This condition of release also has 'nil' cashing restrictions. Under subregulation 6.21(1) of the SISR, a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies. Paragraph 6.21(2)(a) dictates that benefits must be cashed as single lump sums for non-dependants; only dependants (for SISR purposes) may cash benefits in the form of a superannuation income stream in the retirement phase, as per paragraph 6.21(2)(b) and subregulations 6.21(2A) and (2B) of the SISR. | Detailed Reasoning - Legislative framework - Taxation of benefits: 13. Subsection 995-1(1) of the ITAA 1997 defines 'superannuation benefit' as having the meaning given by section 307-5. 14. Section 307-5 of the ITAA 1997 states: 307-5(1) A superannuation benefit is a payment described in the table. Table 2: Types of superannuation benefits | Detailed Reasoning - Superannuation death benefit: 1 | Detailed Reasoning - superannuation fund payment: A payment to you from a superannuation fund because you are a fund member. A payment to you from a superannuation fund, after another person's death, because the other person was a fund member. (Table truncated) 307-5(2) A superannuation member benefit is a payment described in column 2 of the table. [...] 307-5(4) A superannuation death benefit is a payment described in column 3 of the table. 15. Section 307-70 of the ITAA 1997 defines 'superannuation income stream benefit' and 'superannuation income stream': 307-70(1) A superannuation income stream benefit is a superannuation benefit specified in the regulations that is paid from a superannuation income stream. 307-70(2) A superannuation income stream has the meaning given by the regulations. 16. The Income Tax Assessment (1997 Act) Regulations 2021 (ITAR 2021) specifies a superannuation benefit for the purposes of subsection 307-70(1) and the definition of 'superannuation income stream' for the purposes of subsection 307-70(2) and are not discussed further in this response. 17. If a superannuation benefit does not satisfy the ITAR's definitions of a superannuation income stream benefit, subsection 307-65(1) of the ITAA 1997 states: 307-65(1) A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (see section 307-70). | Detailed Reasoning - Application - Taxation of benefits: 18. The benefit of $X,XXX,XXX paid from the Member's pension phase account as requested shortly before their death, but received in their bank account after their death, is a superannuation lump sum. This is a straightforward application of subsection 307-65(1) ITAA 1997. | Detailed Reasoning - Legislative framework: 19. The distinction between a superannuation member benefit and a superannuation death benefit is important because the tax treatment of the superannuation benefit varies according to its classification (as well as the age of the recipient and the components of the benefit). 20. The tax treatment of superannuation member benefits is set out in Division 301 of the ITAA 1997. Broadly, section 301-10 states that if a member is 60 years or over when they receive a superannuation benefit, the benefit is non-assessable and non-exempt income. This applies whether the superannuation benefit is a lump sum or an income stream benefit. (If the taxable component of the benefit has an element untaxed in the fund, the untaxed element is assessable income and either section 301-95 or 301-100 will apply depending on whether the benefit is a lump sum or an income stream benefit.) 21. The tax treatment of superannuation death benefits is set out in Division 302 of the ITAA 1997. Subdivision 302-B applies where the recipient is a death benefits dependant of the deceased, and Subdivision 302-C applies where the recipient is not a death benefits dependant of the deceased. As the Member did not have any death benefits dependants this response will not discuss Subdivision 302-B further. 22. Regarding a superannuation lump sum that a person receives because of the death of another person of whom they are not a death benefits dependant: a. section 302-140 states that the tax-free component is non-assessable and non-exempt income; b. subsection 302-145(1) states that the taxable component is assessable income. However, subsection 302-145(2) entitles the recipient to a tax offset to ensure the rate of tax on the element taxed in the fund does not exceed 15%, and subsection 302-145(3) entitles the recipient to a tax offset to ensure the rate of tax on the element untaxed in the fund does not exceed 30%. | Detailed Reasoning - Death benefit or member benefit: 23. An amount that a member requested to be paid from their superannuation fund before their death, but was paid after their death, may be classified as a member benefit instead of a death benefit depending on the facts and circumstances of the payment. 24. A trustee of a regulated superannuation fund can only pay superannuation benefits according to the fund's governing rules, including the fund's trust deed and relevant legislation. These governing rules set out when benefits can be paid and who they can be paid to, including after a member's death. A superannuation fund's governing rules must be read carefully to determine a member's benefit entitlements in the event of death. 25. The trustee of the superannuation fund must assess whether the amount that the member requested to be paid is a member benefit or a death benefit based on the facts known at the time of the payment, including: a. the terms of the member's request; b. the terms of the trust deed and any other governing rules; c. the fund trustee's knowledge at the time that the payment is made (including whether they are aware that the member has died); d. the entity that the payment is being paid to; e. the circumstances and timing of the payment; and f. whether the payment is made because of and consistent with the member's request. | Detailed Reasoning - Lump sum benefit of $X,XXX,XXX from pension phase account requested shortly before Member's death on X XX 20XX.: At the time the Administrator submitted the payment request, the Member had already satisfied a 'nil' condition of release (attaining the age of 65 years) and their superannuation benefits had been converted to unrestricted non-preserved benefits. They were thus entitled to: a. voluntarily cash their benefits at any time (consistent with subregulation 6.20(1) of the SISR); b. cash the whole or a part of her benefits (consistent with subregulation 6.20(2) of the SISR); and c. cash the benefits as one or more lump sums (paragraph 6.20(3)(a) of the SISR) or one or more pensions (paragraph 6.20(3)(b) of the SISR). (The Member was in fact receiving a pension prior to submitting the payment request.) 26. The SISR also permitted the release of superannuation benefits when the Member met the 'nil' condition of release of death. Subregulation 6.21(1) of the SISR states that a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies. 27. Considering the facts, at the time of the payment of the lump sum benefit: a. We assume that the benefits were paid in accordance with the SMSF's trust deed and other governing rules. b. The lump sum benefits were paid to the Member's personal bank account in accordance with a valid request made by the Administrator (on the Member's behalf) prior to his death. c. The Trustee of the SMSF was aware of the Member's death before it paid the lump sum benefits. d. Even though the lump sums were paid into the Member's personal bank account, as the Trustee was aware of the Member's death and payment of the lump sum was paid some 28 weeks later, it cannot be said that the Trustee made the payments with the expectation that the Member would be alive to receive it. e. The extended timeframe between the Trustee becoming aware of the Member's death shortly after it occurred and the payments not being made for another 28 weeks indicates the payments were no longer made because of and consistent with the Member's request, but rather as a consequence of winding up the Member's estate. 28. Accordingly, it is reasonable to treat the total superannuation lump sum benefit of $X,XXX,XXX as a superannuation death benefit. The tax treatment in Division 302 of the ITAA 1997 should apply to the benefit.