ATO Interpretative Decision

ATO ID 2014/2

Income Tax/Superannuation

Income tax treatment of an income stream, arising from a family law payment split, paid to a deceased estate from an exempt public sector superannuation scheme.

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Issue

Is each payment of an income stream to a deceased estate, from an exempt public sector superannuation scheme, treated as a superannuation lump sum death benefit for the purposes of Subdivision 302-C of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. Each income stream payment to a deceased estate, from an exempt public sector superannuation scheme, is treated as a superannuation lump sum death benefit for the purposes of Subdivision 302-C of the ITAA 1997 on the facts given below.

Facts

At the time of her death the deceased was receiving an income stream paid to her as a non-member spouse from her ex-husband's state public sector superannuation scheme (the scheme). She derived the income stream as a result of an order of the Family Court of Australia and each payment met the definition of a 'family law superannuation payment' under subsection 307-5(7) of the ITAA 1997.

The scheme is an 'exempt public sector superannuation scheme' listed in Part 3 of Schedule 1AA to the Superannuation Industry (Supervision) Regulations 1994 (SISR). It is not a regulated superannuation fund per section 19 of the Superannuation Industry (Supervision) Act 1993 (SISA).

The scheme rules do not allow the payment of benefits as a lump sum. Subsequent to the deceased's death the scheme notified the deceased estate that they would continue to pay the income stream fortnightly into the deceased estate's bank account while the ex-husband member of the scheme was still alive.

To date the income stream payments into the deceased estate's bank account have not been distributed to the beneficiaries. The deceased estate cannot be fully wound up due to the continued existence of the income stream.

All other assets of the deceased estate have been distributed to the beneficiaries, the deceased's adult children, who are not death benefits dependants per section 302-195 of the ITAA 1997.

Reasons for decision

A superannuation death benefit

By virtue of subsections 307-5(5) and (6) of the ITAA 1997, the deceased was treated as a member of the fund and each payment she received was a 'superannuation benefit' under subsection 307-5(1) of that Act. Since her death, each payment received from the income stream by the trustee of the deceased estate is a 'superannuation death benefit' under item 1, column 3, of the table in subsection 307-5(1).

Not a superannuation income stream

Since 1 July 2007 a superannuation death benefit in the form of a 'superannuation income stream', from a regulated superannuation fund, cannot be paid to a non-dependant of the deceased: sub-regulations 6.21(2A) and 6.21(2B) of the SISR. The deceased's adult children, who are the beneficiaries of the deceased estate, were non-dependants of the deceased.

However the scheme is not a regulated superannuation fund. Therefore the prohibition in the SISR on the payment of a superannuation death benefit in the form of a superannuation income stream to a non-dependant of the deceased does not apply.

The scheme is listed as an 'exempt public sector superannuation scheme' under Schedule 1AA to the SISR. Such schemes are subject to supervision under the relevant Commonwealth, state or territory enabling acts and not the SISA or the SISR.

In this case the scheme's operating rules allow for the payment of an income stream to a non-dependant of the deceased. Therefore the payments will continue to be made to the deceased estate until such time as the deceased's former spouse dies.

Despite the payments being treated as an income stream under the rules of the fund, the definition of a 'superannuation income stream' in the ITAA 1997 requires that the payments be made in compliance with the SISA and SISR: subsection 307-70(2) of the ITAA 1997 and regulation 995-1.01 of the Income Tax Assessment Regulations 1997. The payments are not made in compliance with the SISA and SISR because that legislation does not govern an exempt public sector superannuation scheme. Therefore they are not a 'superannuation income stream' under the ITAA 1997.

Tax treatment of superannuation death benefits

An exempt public superannuation scheme is nevertheless a complying superannuation plan for income tax purposes: see the definition of 'complying superannuation plan' in subsection 995-1(1) of the ITAA 1997. It follows that Division 302 of the ITAA 1997 applies to each payment from the fund: see paragraph 302-5(a)

Division 302 of the ITAA 1997 sets out the tax treatment of superannuation death benefits. The tax treatment depends on whether the person receiving the benefit is a dependant of the deceased and whether the amount is paid as a lump sum benefit or an income stream death benefit.

The beneficiaries of the estate are not death benefit dependents of the deceased per section 302-195 of the ITAA 1997.

Section 307-65 of the ITAA 1997 states that a 'superannuation lump sum' is a 'superannuation benefit' that is not a 'superannuation income stream benefit'. Subsection 307-70(1) of the ITAA 1997 states that a 'superannuation income stream benefit' is a 'superannuation benefit' specified in the regulations that is paid from a 'superannuation income stream'.

As each payment is a superannuation benefit that is not a superannuation income stream benefit, each payment to the deceased estate meets the definition of a 'superannuation lump sum' under section 307-65 of the ITAA 1997.

Section 302-10 of the ITAA 1997 applies to superannuation death benefits paid to a trustee of a deceased estate. Under subsection 302-10(3), if beneficiaries of the estate are not death benefits dependants of the deceased, the superannuation death benefit is income of the trustee. It is taken to be income to which no beneficiary is presently entitled so that the trustee, rather than the beneficiary, is liable to pay tax on the benefit.

Each payment to the trustee of the deceased estate is taxed as a 'superannuation lump sum' under Subdivision 302-C of the ITAA 1997.

Date of decision:  7 February 2014

Year of income:  Year ending 30 June 2009

Legislative References:
Income Tax Assessment Act 1997
   Division 302
   Subdivision 302-C
   paragraph 302-5(a)
   section 302-10
   subsection 302-10(3)
   section 307-5
   subsection 307-5(1)
   subsection 307-5(5)
   subsection 307-5(6)
   subsection 307-5(7)
   section 307-65
   subsection 307-70(1)
   subsection 307-70(2)
   subsection 995-1(1)

Income Tax Assessment Regulations 1997
   Regulation 995-1.01

Superannuation Industry (Supervision) Regulations 1994
   Sub-regulation 6.21(2A)
   Sub-regulation 6.21(2B)
   Schedule 1AA

Keywords
Death benefits - superannuation benefits
Deceased estate
Family Law
Income stream - superannuation benefits
Lump sum - superannuation benefits
Public sector superannuation funds
Superannuation
Superannuation benefits
Superannuation benefits from public sector schemes
Superannuation income stream

Siebel/TDMS Reference Number:  1-52N8PKG; 1-762UHG7

Business Line:  Superannuation

Date of publication:  14 February 2014
Date reviewed:  3 September 2015

ISSN: 1445-2782