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Edited version of your private ruling
Authorisation Number: 1051674437545
Date of advice: 13 May 2020
Subject: Superannuation death benefits
Will the payments be treated as a 'superannuation death benefit' for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?
Will the payments be treated as a 'superannuation member benefit' for the purposes of the ITAA 1997?
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The application is being made on behalf of the Fund which is a SMSF.
Prior to death the trustee of the fund is a Company Pty Ltd (the Trustee)
· Directors: the Deceased
· Shareholders:the Deceased
· Members:the Deceased
The applicant has advised of the following sequence of events leading up to date of death and post death events
· Early 20XX - the Deceased was diagnosed with a terminal illness and was given an outline of medical treatment to be undertaken including chemotherapy and radiation therapy
· Early 20XX - Late 20XX the Deceased underwent treatment for terminal illness including spending some XX weeks in hospital
· Late 20XX - The Deceased was advised that there was nothing else they could do in Australia and that the Deceasedshe was a stage 4 and life expectancy was X-X months.
· Late 20XX - The Deceased being of XXXXX background travelled regularly back to Continent Y every year made the wishes clear that the Deceased wanted to move permanently to a foreign country (the Country ) and also explore alternative treatments in Continent Y.
· Late 20XX - The Deceased met with the applicant to discuss the Deceased desire to move permanently to Continent Y in Early 20XX and start to put their affairs in place and move all their assets to Continent Y to support their medical requirements.
· Late 20XX - The Deceased attended a hospital for pre-radiation treatment for travel in January 20XX
· Late 20XX - The Deceased met with their Lawyer and the Applicant in the Lawyer's office to finalise a number of legal and accounting matter as follows:
· Updated their last will
· Signed formal letter to the Directors of ABC Pty Ltd advising them that the Deceased
- requesting at all their funds be withdrawn from their superannuation fund and
- deposited to their nominated account (document provided)
· Signed a general power of attorney in the favour of the applicant (copy provided) to attend to cleaning up the balance of their affairs in their absence (sale of house etc).
· Late 20XX- attended treatment in hospital and was advised of a very short life expectancy
· The Deceased called the Applicant who met with the Deceased in hospital and made the wishes quite clear that the Deceased wished to pass away in the Country surrounded by friends and family (as she had no relative in Australia)
· Late 20XX -The Applicant had organised the travel for the Deceased to the Country
· Late 20XX The Deceased flew to the Country and went straight to palliative care
· Early 20XX- The Deceased passed away.
As outlined in the dateline the Deceased instructed the Trustees of the Fund in late 20XX that the Deceased wanted all their funds withdrawn and transferred to their bank account. The Deceased was previously advised, that as the Deceased was leaving Australia permanently that residency issues would become an issue for both the SMSF and the Corporate trustee which would not have a resident director and control would be off shore.
At the date of giving the Trustee instructions to withdrawal all the Deceased benefits the SMSF had the following assets:
· An amount in a cash account
· An amount in a Term Deposit maturing early 20XX.
· Other amounts in bank accounts.
It was discussed post instructions with the trustee and the bank about gaining access to the term deposit funds and was advised that under the current banking money laundering rules the Trustee's need to give 30 days' notice to break the term deposit and that interest penalties would be imposed. As the difference between 30 day and the normal maturity date of the term deposit was only a matter of a number of days the financial loss to the member would not be acceptable for such a short period of time and the decision was made to payout all funds in early 20XX on maturity of the term deposit.
Due to the Deceased passing in early 20XX the Applicant's power of attorney now had no legal bearing and they could no longer act in the Deceased's instructions to have all the funds transferred across to her personal account.
As instructed by the Deceased's legal representative, the executors of the Deceased's affairs would have to be appointed as directors of the Trustee and give the bank directions as to the transfer of the fund. According to the legal personal representative they needed to wait for probate to be granted mid 20XX prior to the appointment as directors of the Trustee Company.
As the Deceased passed away in the Country and had been making preparation to move there on a permanent basis with permanent residency visa etc, on the Deceased's passing it was issues raised by the Country authorises and possibility of the estate being under their authority and tax jurisdiction. Whilst all these matters were resolved in favour of the Deceased being an Australian tax resident, these all held up resolving both the SMSF and estate matter.
The applicant is now in a position to payout final payments of the estate but as the beneficiaries of the estate are not financial dependents of the Deceased there is a different tax treatment to members withdrawal verses member death benefits which are taxable.
The applicant seeks a ruling on whether as the member gave written instructions to withdrawal all her benefits prior to death that these payments should be treated as a member's withdrawal benefit verses a death benefit.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsectio995-1(1).
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 307-10(2).
Income Tax Assessment Act 1997 Subsection 307-145(2).
Income Tax Assessment Act 1997 Subsection 307-145(3).
Reasons for decision
The payment made by the Fund after the death of the Deceased is a superannuation death benefit and not a superannuation member benefit.
The superannuation death benefit will be taxed in the Deceased's estate, in accordance with whether each person to receive part of that benefit is a dependant or non-dependant of the deceased.
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. The superannuation death benefit described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 is:
A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.
The table contained in subsection 307-5 (1) of the ITAA 1997 describes a superannuation member benefit as including:
A payment to you from a superannuation fund because you are a fund member.
Section 302-10 of the ITAA 1997, which deals with superannuation death benefits paid to the trustee of the deceased estate, 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.
It should be noted that once a person had died, all the person's assets, including the person's bank account, becomes part of the person's estate which is administrated by the trustee of the deceased estate.
In this case, you have advised that due to having to wait for the maturity of a term deposit, probate and residency issues in relation to the Deceased, you are only now in a position to resolve the issues with the Fund and the estate of the Deceased.
Any payments made after the deceased's death even if paid from the Fund into another bank account of the Deceased is, in fact, a payment made into the deceased's estate, that is, a payment made to the trustee of that estate.
Even if it was the case that the payment was not made to the Deceased from the Fund the payment made comprises the realisation of assets held by the Fund, and would be paid directly to the deceased Estate at the instruction of the Fund's trustee. As such, it is considered that it is a payment made from a superannuation fund.
In this case, the payments to the non-dependants from the Estate are not superannuation member benefits as it is not a payment from the Fund because the non-dependants were members of the Fund.
As the payment in this case will be a superannuation death benefit received from a superannuation fund by the trustee of the deceased estate, section 302-10 of the ITAA 1997 will apply to the trustee of the deceased estate.
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 how the benefits would be taxed if received directly by the person or persons intended to benefit from the estate.
Where a dependant of the deceased is entitled to receive part or all of the superannuation death benefit from the estate, subsection 302-10(2) and section 302-60 of the ITAA 1997 operate to make that part of the benefit tax-free in the hands of the trustee.
However, where a person, who is not a death benefits dependant of the deceased, is expected to receive part or all of a superannuation death benefit, that part of the benefit will be subject to tax in the estate as if it were paid directly to a non-dependant of the deceased.
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 1997 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.
(2) 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 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%
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.