Edited version of private ruling

Authorisation Number: 1011505085493

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Ruling

Subject: Superannuation death benefits

Question:

Are the superannuation death benefit payments included in the assessable income of the deceased estate?

Answer:

Yes

This ruling applies for the following period:

Year ended 30 June 2009

The scheme commenced on:

1 July 2008

Relevant facts:

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased passed away in the 2007-08 income year.

The deceased shared a rental property in Australia with a relative and another person who had no relationship with the deceased prior to the deceased's death.

In relation to the beneficiary:

(a) the beneficiary is the god child of the deceased;

(b) the beneficiary is a minor school student;

(c) the beneficiary's parents are divorced; and

(d) the beneficiary lives with her parent in an overseas country.

In the 2008-09 income year, the trustee of the deceased estate received two superannuation death benefits from an Australian superannuation fund (the Fund).

This ruling is given on the basis of the facts stated in the description of the scheme as set out above. Any material variation from these facts (including any matters not stated in the description above and any departure from these facts) will mean that the ruling will have no effect. No entity will then be able to rely on this ruling as the Commissioner will consider that the scheme has been implemented in a way that is materially different from the scheme described.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 302-10(1)

Income Tax Assessment Act 1997 Paragraph 302-200(1)(b).

Income Tax Assessment Act 1997 Section 302-140.

Income Tax Assessment Act 1997 Subsection 302-145.

Income Tax Assessment Act 1997 Subsection 302-195(1)

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 307-5(1)

Income Tax Assessment Act 1997 Section 307-5(4)

Reasons for decision

Summary

No part of the superannuation lump sum death benefits paid from an Australian superannuation fund to the trustee of the deceased estate will be tax free as it is considered that the payments were not made in relation to a dependant.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

For superannuation death benefits paid after 1 July 2007, subsection 995-1(1) of the Income Tax Assessment Act 1997 (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. A superannuation death benefit is described in Column 3 of Item 1 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.

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 of the ITAA 1997.

In this case the deceased died in the 2007-08 income year. Prior to the deceased's death the deceased was a member of an Australian superannuation fund (the Fund).

Two payments were made directly to the trustee of the deceased estate during the 2008-09 income year from the Fund after the deceased's death, because the deceased was a fund member. Hence these 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.

These payments are superannuation death benefits as defined in subsection 307-5(4) of the ITAA 1997 and the superannuation lump sums within the meaning of section 307-65 of the ITAA 1997. As the payments were made by the Fund after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply.

Application of section 302-10 of the ITAA 1997

Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the trustee of a 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 in this case were superannuation death benefits received from the Fund by the trustee of the deceased 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.

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.

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.

Accordingly, in the present case, the payments from the Fund paid to the trustee of the deceased estate are assessable to the trustee as income to which no beneficiary is presently entitled.

The superannuation death benefit will be treated concessionally if dependants of the deceased will benefit from the estate. Where a person receives a superannuation death benefit and that person was a dependant of the deceased, it is not assessable income and is not exempt income.

It will now be determined if the beneficiary is a dependant of the deceased.

'Death Benefits Dependant' in relation to the Superannuation Death Benefit

Subsection 302-195(1) of the ITAA 1997 defines death benefits dependant as follows:

A death benefits dependant, of a person who has died, is:

(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 person just before he or she died.

Under paragraph 302-200(1)(b) of the ITAA 1997 an 'interdependency relationship' requires that the two persons live together.

In this case, the beneficiary did not live with the deceased prior to the date of death. The beneficiary is a minor who is living with her parent in an overseas country. Accordingly, there was no interdependency relationship between the deceased and the beneficiary.

For payments made after 30 June 2007, if an interdependency relationship cannot be established, dependency based on financial dependency will need to be established.

Financial dependency

According to the Macquarie Dictionary, one meaning of the term 'dependant' is - 'a person to whom one contributes all or a major amount of necessary financial support.'

In the CCH Macquarie Concise Dictionary of Modern Law a 'dependant' is defined as being - 'a person substantially maintained or supported financially by another.'

In both dictionary definitions the emphasis is on the fact that the financial support or maintenance is substantial. In determining whether a person is a dependant it is necessary to establish the actual level of financial support that was provided to that person by the deceased. This is because dependence is assessed on the basis of the actual fact of dependence or reliance on the earnings of another for support. This is a question of fact (Aafjes v. Kearney 8 ALR 455, Barwick CJ at 456).

In Case [2000] AATA 8, 43 ATR 1273, Senior Member Fayle, in considering the definition of 'dependant' in relation to section 27AAA of the ITAA 1936, stated:

The Act is primarily concerned with commercial and financial matters"…An Act relating to the imposition assessment and collection of tax upon incomes". As such, a question of dependency should be construed within that context. The relevant question in this sense is whether the applicants were financially dependent on their son at the relevant time.

Where the level of financial support provided to a person is substantial then that person can be regarded as a dependant. So a 'financial dependant' is considered to be a person to whom another person contributes all or a major amount of necessary financial support. If the level of financial support is insignificant or minor, then the person cannot be regarded as a dependant.

In the Victorian Supreme Court case of Fenton v. Batten [1949] ALR 69; [1948] VLR 422, Justice Fullager made the following comments regarding dependency:

The word 'dependant' is, in a true sense a technical term. If the evidence established that the alleged 'dependant' relied on or relies on another as the source wholly or in part of his or her existence then dependence is established. Questions of 'scale of living' do not enter into the matter in the absence of some such statutory enactment.

These comments made in Fenton v. Batten when read in the context with the facts established in that case, would tend to confirm the definition of 'dependant' contained in the CCH Macquarie Dictionary of Modern law and the meaning quoted above from the Macquarie Dictionary.

In the full High court case of Kauri Timber Co. (Tas) Pty Ltd v. Reeman [1973] (1973) 47 ALJR 184; [1972-73] ALR 1266; (1973) 128 CLR 177 at (CLR) 180, Justice Gibbs (as he then was) in speaking of previous cases on the issue of dependency stated that:

The principle underlying these authorities is the actual fact of dependence or reliance on the earnings of another for support that is the test.

Handing down the decision in Malek v. Federal Commissioner of Taxation 42 ATR 1203, 99 ATC 2294 (Malek's Case), Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) further clarified the meaning of the word 'dependant', stating:

In my view, the question is not to be decided by counting up the dollars required to be spent on the necessities of life for [Mrs Malek], then calculating the proportion of those dollars provided by the [son] and regarding her as a dependant only if that proportion exceeds 50%...In my view, the relevant financial support is that required to maintain the person's normal standard of living and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard.

In Malek's Case, the evidence supplied by the taxpayer was able to demonstrate that the financial support received from her deceased son had been significant. The son had accepted responsibility for mortgage repayments, maintenance and other expenses of the unit in which the taxpayer lived.

Taking into account all of the above, it is considered that financial dependence occurs where a person is wholly or substantially maintained financially by another person. The point to be considered is whether the facts show that a person depended or relied on the earnings of the deceased for their day to day sustenance.

If the financial support provided merely supplements the person's income and represents 'quality of life' payments, then it would not be considered substantial support. What needs to be determined is whether or not the person would be able to meet their daily basic necessities (shelter, food, clothing, etc.) without the additional financial support.

In this case, the deceased was a relative/god parent of the beneficiary. The beneficiary was a minor at the time of the death of the deceased. Hence the point to be considered is whether the facts show that the beneficiary depended or relied on the earnings of the deceased for the beneficiary's day to day sustenance at the time of the deceased's death.

On the basis of the facts provided it is considered that the beneficiary was not a dependant of the deceased as:

(v) the deceased did not provide any financial support to the beneficiary for the beneficiary's day to day sustenance;

(vi) the beneficiary is living with her parent in an overseas country;

(vii) the beneficiary's financial support is from their parents; and

(viii) the deceased provided gifts and spending money to the beneficiary whenever she had the opportunity, not on a regular basis.

Given the above, it is considered the beneficiary was not reliant on the deceased's regular contributions towards her living and other expenses over the years and up to the deceased's death.

In view of the above, it is considered that the beneficiary was not financially dependant on the deceased at the time of the deceased's death and therefore the beneficiary is not considered to be a dependant of the deceased within the definition of death benefits dependant in section 302-195 of the ITAA 1997.

Tax Treatment of death benefit payments paid to the trustee of a deceased estate

As previously mentioned, where the trustee of a deceased estate receives a superannuation death benefit in their capacity as a trustee:

if a dependant of the deceased is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a dependant, and

if a person who is a non-dependant is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a non-dependant.

In both cases, the benefit is taken to be income to which no beneficiary is presently entitled.

Death benefits to a non-dependant:

The tax free component of a superannuation lump sum paid to a non-dependant is tax free under section 302-140 of the ITA 1997. The taxable component of the lump sum is included in assessable income, with a tax offset to ensure that the rate of tax on the element taxed in the Fund does not exceed 15% and that the rate of tax on the element untaxed in the Fund does not exceed 30%. This is in accordance with section 302-145 of the ITAA 1997. No Medicare levy is added to the rates mentioned above.

In this case as the beneficiary of the deceased is a non-dependant beneficiary the superannuation benefits will be taxed as explained above, in the hands of the estate.

When the death benefit is eventually paid to the beneficiary by the trustee of the deceased estate, the beneficiary will not be liable to pay income tax on her share of the benefit, as the portion of the benefit will represent a distribution of the corpus (or capital) of the estate.

The following steps are required to ensure that the superannuation payments are taxed correctly:

· the trustee for the estate should lodge a trust estate income tax return for the income year disclosing the taxable component of the superannuation payments and any other income of the estate, as assessable income. The trustee of the estate will have the responsibility of paying the applicable tax.

· the trustee of the deceased estate is also required to lodge a tax return of the deceased's income up to the date of death.

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