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Edited version of private advice
Authorisation Number: 1051790210533
Date of advice: 16 December 2020
Subject: Death benefits
Can the payment made by the deceased taxpayer's superannuation fund be treated as a non- assessable and non-exempt member benefit as defined in section 303-10 of the Income Tax Assessment Act 1997 (ITAA 1997)
This ruling applies for the following period:
1 July 20XX to 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
The deceased was XX years of age at the time of their death
The deceased suffered from terminal cancer.
In early 20XX the deceased submitted an insurance claim through their super fund due to terminal illness.
In the 20XX-XX income year the insurance claim was processed by the insurer and awaiting approval from the Trustee of the Fund.
The member died in 20XX-XX income year.
A death benefit was paid to the deceased estate in the 20XX-XX income year.
Relevant legislative provisions
Income Tax Assessment Act 1936 subsection 101A(3)
Income Tax Assessment Act 1997 section 302-10
Income Tax Assessment Act 1997 subsection 302-10(2)
Income Tax Assessment Act 1997 subsection 302-10(3)
Income Tax Assessment Act 1997 subsection 302-60
Income Tax Assessment Act 1997 subsection 302-145(2)
Income Tax Assessment Act 1997 subsection 302-195
Income Tax Assessment Act 1997 section 303-10
Income Tax Assessment Act 1997 section 307-5(1)
Income Tax Assessment Act 1997 section 307-5(4)
Reasons for decision
Summary of decision
The superannuation benefit is a superannuation death benefit made from the Fund to the Estate. Therefore, the payment cannot be treated as a non- assessable and non-exempt member benefit as defined in Section 303-10 of the Income Tax Assessment Act 1997.
A superannuation death benefit paid is defined in subsection 307-5(4) of the Income Tax Assessment Act 1997 as a payment 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.'
Further a superannuation death benefit must be paid as either a superannuation lump sum or a superannuation income stream.
In this case, the member died in the 20XX-XX financial year, prior to the insurance claim being accepted and signed off by the Trustee of the Fund. Furthermore, the Fund paid the death benefit claim submitted by the estate in 20XX-XX financial year.
Therefore, the payment is a superannuation death benefit as defined in Column 3 of Item 1 of the table under subsection 307-5(1) of the ITAA 1997 made to the estate.
Taxation Consequences for the Estate
Subsection 101A(3) of the ITAA 1936 states:
To avoid doubt, if in the year of income an amount is included in the assessable income of a deceased taxpayer under Division 82 or 302 of the Income Tax Assessment Act 1997 in respect of a payment received by the trustee of the estate of the deceased taxpayer, that amount shall be included in the assessable income of that year of income of the trust estate.
Subsection 101A(3) of the ITAA 1936 specifically brings into the assessable income of the trust estate the amount of a superannuation death benefit received after the death of a taxpayer, and provides that the amount is income to which no beneficiary is presently entitled. The result of this provision is that any tax liability raised in respect of the death benefit will be borne by the trustee of the estate rather than the beneficiaries.
In this case, the superannuation payment was a death benefit that was made directly to the estate as there was no binding death benefit direction held by the Fund at the time of making the payment. Accordingly, the taxed element of the superannuation death benefit made to the estate is not tax-free.
Taxation of lump sum payments to terminally ill members
The conditions for lump sum superannuation payments to terminally ill members being tax-free are addressed under subsections 303-10(1) and 303-10(2) of the ITAA 1997. Subsection 303-10(1) states:
This section applies to a *superannuation member benefit that:
(a) is a superannuation lump sum; and
(i) paid from a complying superannuation plan; or
(ii) a superannuation guarantee payment, a small superannuation account payment, an unclaimed money payment, a superannuation co-contribution benefit payment or a *superannuation annuity payment.
However, subsection 303-10(2) states that:
The lump sum is not assessable income and is not exempt income if a terminal medical condition exists in relation to you when you receive the lump sum or within 90 days after you receive it.
The above subsections were inserted into Division 303 of the ITAA 1997 as a result of amendments contained in the Tax Laws Amendment (2008 Measures No.2) Act 2008 to make lump superannuation payments tax-free when paid to an individual member with a terminal medical condition.
Further, the fact that the payment must be made to a person with a terminal condition is mentioned in paragraph 14.3 of Chapter 7 in the Revised Explanatory Memorandum - SEN to Tax Laws Amendment (2008 Measures No.2) Act 2008 which states:
14.3 These amendments provide that a superannuation lump sum paid from either a taxed or an untaxed source to a person with a terminal medical condition is tax free.
The facts of this case show that, although the deceased was in the process of claiming a benefit prior to their death, the lump sum payment was made after the deceased's death.
Accordingly, the payment, a superannuation death benefit, cannot be viewed as a payment from the Fund to the deceased made prior to the date of death but as a payment of the deceased's benefits from the Fund to the estate which will ultimately be distributed to non-dependant beneficiaries.
As the payment was made after the deceased's death and it was paid to the estate, the lump sum payment is not tax-free under section 303-10 of the ITAA 1997 or any other provision under the legislation.