Private ruling: Lump sum death benefit
Date of advice: 21 July 2016
Published: September 2016
Ruling period: Income year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Will an amount that is paid to a person (the Beneficiary) from an unallocated reserve as a superannuation death benefit lump sum be treated as a concessional contribution as defined in section 291-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: The Beneficiary is a death benefit dependant of the Deceased under section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997) as the Deceased and the Beneficiary were in an interdependency relationship under section 302-200 of the ITAA 1997 before the Deceased died. A person who has died (the Deceased) was the sole member of a complying self-managed superannuation fund (the Fund). The trustee of the Fund (the Trustee) was paying a superannuation income stream (the Pension) to the Deceased. The Pension was commuted as a result of Deceased's death. When the Deceased died, the amount equal to the value of assets supporting the Pension was greater than the amount equal to the residual capital value of the Pension. The amount in excess of the residual capital value of the Pension was transferred to an unallocated reserve in the Fund (the Reserve). When the Deceased died, there was also a pension investment adequacy reserve account. The balance of this account was also transferred to the Reserve. The Reserve is used solely for the purpose of enabling the Fund to discharge its liabilities in relation to the payment of the Pension. Pursuant to the trust deed of the Fund: 1) on the death of a member the Dependant of the deceased member (and if more than one, in proportions to be determined by the trustee) is entitled to be paid the amount standing to the credit of the deceased member's account, and if there is no such Dependant, then the benefit may be paid to the deceased member's legal personal representative; and 2) a 'Dependant' in relation to a member or former member means a dependant as defined in section 10 of SIS, including persons who may come within the definition subsequent to the execution of the Fund Deed. The Trustee intends to pay the balance of the Reserve to the Beneficiary as a lump sum death benefit as soon as practicable. The Beneficiary is an adult child of the Deceased. They had an interdependency relationship with the Deceased under section 302-200 of the ITAA 1997 and are a death benefits dependant of the Deceased as defined in section 302-195 of the ITAA 1997. The other children of the Deceased have brought proceedings in the Supreme Court against the Deceased's Estate and the Trustee. Thus, it was not practical to make the payment to the Beneficiary to date.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 291 | Income Tax Assessment Act 1997 Section 291-25 | Income Tax Assessment Act 1997 Subsection 302-10 | Income Tax Assessment Act 1997 Subsection 302-60 | Income Tax Assessment Act 1997 Subsection 302-195 | Income Tax Assessment Act 1997 Subsection 302-200 | Income Tax Assessment Act 1997 Section 307-5 | Income Tax Assessment Act 1997 Subsection 995-1(1) | Income Tax Regulations 1997 Subregulation 292-25.01(4)

Reasons for decision: Summary: A superannuation lump sum death benefit paid to the Beneficiary from the Reserve is not considered to be concessional contribution for the purposes of section 291-25 of the ITAA 1997. | Detailed Reasoning - Concessional contributions: Subsection 291-25(1) of the ITAA 1997 provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 291-25(2) of the ITAA 1997 and each amount covered under subsection 291-25(3) of the ITAA 1997. Contributions which are covered by subsection 291-25(2) of the ITAA 1997 are generally contributions made by or for a person to a complying superannuation plan and are included in the assessable income of a superannuation provider. Subsection 291-25(3) of the ITAA 1997 includes in a person's concessional contributions for a financial year an amount in a complying superannuation plan that is allocated for the person for the year in accordance with the conditions specified in the regulations. Provisions in the Act that inserted Division 291 into the ITAA 1997 operate to ensure that the regulations applying to concessional contributions in Division 292 of the ITAA 1997 continue to apply to Division 291 of the ITAA 1997. Consequently, regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997) sets out these conditions. Subregulation 292-25.01(4) of the ITAR 1997 provides that an amount allocated from a reserve is treated as being allocated in a way covered by subsection 291-25(3) of the ITAA 1997 unless an exclusion in subregulation 292-25.01(4) of the ITAR 1997 applies. Specifically, paragraph 292-25.01(4)(b) of the ITAR 1997 provides that an amount that is allocated from a reserve will be treated as concessional contributions unless: (i) the amount is allocated from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities (contingent or not) as soon as they become due, in respect of superannuation income stream benefits that are payable by the fund at that time; and (ii) any of the following applies: … (C) on the commutation of the income stream as a result of the death of the primary Beneficiary, the amount: (I) is allocated to a death benefits dependant to discharge liabilities in respect of a superannuation income stream benefit that is payable by the plan as a result of the death; or (II) if sub-sub-subparagraph (I) does not apply - is paid as a superannuation lump sum and as a superannuation death benefit; as soon as practicable. | Detailed Reasoning - Meaning of 'reserve': The term 'reserve' is not defined in the ITAR 1997 or the ITAA 1997. Therefore, it is given its 'ordinary meaning' having regard to the context in which the term appears and the purpose for which regulation 292-25.01 of the ITAR 1997, and in particular subregulation 291-25.01(4) of the ITAR 1997, was enacted. The meaning of 'reserve' as is used in regulation 292-25.01 of the ITAR 1997 was discussed in ATO Interpretive Decision ATO ID 2015/21 ECT: concessional contributions - reserve. The Commissioner's view is that 'reserve', for the purposes of determining the amount of a person's concessional contributions covered under subsection 291-25(3) of the ITAA 1997, is intended to have a broad meaning to maintain the integrity of the contribution caps, and includes an amount set aside from the amounts allocated to particular members to be used for a certain purpose or on the happening of a certain event. From the facts, the Reserve was set aside from amounts allocated to the member to be used solely for the purpose of enabling the Fund to discharge its liabilities in relation to the income stream payable by the Fund. As such, it is a 'reserve' for the purposes of subregulation 292-25.01(4) of the ITAR 1997. | Detailed Reasoning - Meaning of 'superannuation lump sum' and 'superannuation death benefit': In accordance with section 995-1 of the ITAA 1997, superannuation lump sum has meaning given by section 307-65 of the ITAA 1997 and superannuation death benefit has the meaning given by section 307-5 of the ITAA 1997. Section 307-65 of the ITAA 1997 states that superannuation lump sum is a superannuation benefit that is not a superannuation income stream. Subsection 307-5(1) of the ITAA 1997 describes 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'. Based on the above, a lump sum paid to the Beneficiary from the Reserve would be a superannuation lump sum and a superannuation death benefit because it is not an income stream and it is paid from a superannuation fund (the Fund) after another person's death (the Deceased's) because the other person (the Deceased) was a member of the Fund. Therefore, in this case, the exemption under subparagraph 292-25.01(4)(b)(C) of the ITAR 1997 applies to the amount paid to the Beneficiary from the Reserve. Consequently, the amount paid will not be treated as concessional contributions for the purposes of section 291-25 of the ITAA 1997. | Detailed Reasoning - Taxation of the superannuation death benefit: Under section 302-60 of the ITAA 1997, if a person receives a superannuation lump sum because of the death of a person of whom they are a ' death benefits dependant' , it is not assessable income and is not exempt income. Therefore, a superannuation death benefit paid from the Reserve to the Beneficiary directly, is not assessable income and is not exempt income of the Beneficiary. That is, it is tax-free. In accordance with subsection 302-10(2) of the ITAA 1997, if the trustee of a deceased estate receives a superannuation death benefit in their capacity as a trustee, and a death benefits dependant of the deceased is expected to receive part or all of the benefit, the benefit is subject to tax as if it were paid to a death benefits dependant directly. As the Beneficiary is a death benefits dependant of the Deceased, a superannuation death benefit paid from the Reserve to the trustee of the Deceased's estate is not assessable income and is not exempt income to the extent that the Beneficiary has benefited, or may be expected to benefit, from the superannuation death benefit. That is, it is tax-free.