Edited version of private advice

Authorisation Number: 1051920326857

Date of advice: 23 November 2021

Ruling

Subject: Superannuation death benefits paid to trustee of deceased estate

Question 1

Does subsection 302-10(3) of the Income Tax Assessment Act 1997 apply to the superannuation death benefits paid to the estate of the deceased?

Answer 1

Yes.

Question 2

Will the superannuation death benefits, that were paid from the estate of the deceased to the deceased's testamentary discretionary trust (TD Trust), established under the terms of the deceased's will and testament, be treated, by the Trustee of the estate of the deceased as if these had been paid to death benefits dependants?

Answer 2

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The deceased passed away in the 20XX-XX income year.

The deceased left a will in which their spouse is the executor of their estate.

In the 20XX-X income year superannuation death benefits were paid to the estate of the deceased.

Under a clause of the deceased's will (the Will), the deceased's spouse is to hold the balance of the Residuary Estate on the trust set out in the Will.

The trust is a testamentary discretionary trust (the TD Trust).

The appointer and Trustee of the TD Trust is the deceased's spouse.

The Will provides terms and directions of the TD Trust's operation

Under the terms of the Will, 'Beneficiary' means any one of the Primary Beneficiaries and Secondary Beneficiaries. Primary Beneficiaries are the deceased's spouse and lineal descendants. Secondary Beneficiaries includes the trustee of any trust in which the Primary Beneficiaries are named as Beneficiary and any proprietary company in which any Primary Beneficiary is a director or beneficial owner of any type of shares.

The terms of the Will prescribe the way in which the capital of the TD Trust will be held and distributed, and any income or capital gains derived from the superannuation death benefit accumulated, paid or applied for the benefit of one or more of the beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 section 302-195

Income Tax Assessment Act 1997 section307-5

Income Tax Assessment Act 1997 section 307-65

Income Tax Assessment Act 1997 section 307-70

Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision

Summary

The superannuation death benefits paid to the estate of the deceased are treated as if they were paid to a non-dependant of the deceased and subject to tax accordingly.

Detailed reasoning

Under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) a 'superannuation death benefit' has the meaning given by section 307-5.

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). That is:

... 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.

The deceased passed away in the 20XX-XX income year and benefits were paid to the estate of the deceased by several superannuation funds because the deceased was a member of these funds. Hence the payments are superannuation benefits within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 and superannuation death benefits as defined in subsection 307-5(4).

Superannuation death benefits paid to a trustee of a deceased estate

Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the Trustee of the Deceased Estate. Subsection 302-10(1) of the ITAA 1997 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.

As the payments were superannuation death benefits received from superannuation funds by the Executor of the estate, section 302-10 of the ITAA 1997 will apply to the Trustee of the 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 the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate. The provision operates to provide the same tax treatment that would apply were the beneficiary to receive the death benefit directly.

Subsection 302-10(2) of the ITAA 1997 states:

To the extent that 1 or more beneficiaries of the estate who were death benefits dependants 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 a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

This means that where a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a dependant of the deceased, and the benefit is taken to be income to which no beneficiary is presently entitled

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 dependants 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 dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

Accordingly, where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled.

Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant of a person who has died as:

(a)             the deceased person's *spouse or former spouse; or

(b)             the deceased person's *child, aged less than 18; or

(c)             any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

(d)             any other person who was a dependant of the deceased just before he or she died.

Where death benefits have been paid from an estate into a testamentary trust established under a will, the Trustee of the testamentary trust holds the assets of the deceased that have been transferred to the trust, for and on behalf of, the nominated beneficiaries. Therefore, consideration of the terms of the trust and who has or may be expected to benefit from the superannuation death benefits is required in order to determine the relevant tax treatment of the death benefits paid to the deceased's estate.

In this case, the Trustee holds the balance of the Residuary Estate (which includes the superannuation death benefit proceeds) on the testamentary trust set out in the Will. The deceased's spouse is a death benefit dependant under subsection 302-195(1) of the ITAA 1997.

The terms of the Will prescribe the way in which the capital of the TD Trust will be held and distributed, and any income or capital gains derived from the superannuation death benefit accumulated, paid or applied for the benefit of one or more of the Primary and Secondary Beneficiaries.

Who will benefit, or may be expected to benefit, from the capital, or income generated by the death benefit capital of the trust depends on future events the outcome of which cannot be determined at the present time as some of the Beneficiaries encompass a range of individuals and entities, including those not yet in existence. For subsection 302-10(2) of the ITAA 1997 to apply, there needs to be a certainty that death benefit dependants will benefit from the superannuation death benefits in their entirety. The terms of the Will or Trust do not provide certainty that death benefits dependants will benefit from the capital, or the income generated by the death benefit capital.

Accordingly, subsection 302-10(3) of the ITAA 1997 applies in this case and the death benefits paid to the estate of the deceased are subject to tax as if it were paid to a non-dependant of the deceased.