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Ruling

Subject: Superannuation death benefit

Question:

Was the superannuation death benefit received by the Trustee of the deceased estate in the 2009-10 income year paid to a dependant?

Answer:

Yes, to the extent the death benefit is paid towards the discharge of the outstanding mortgage.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The deceased died in the 2008-09 income year.

The deceased was sole owner of a residential property.

The mortgage held over this residential property was with a bank (the Bank).

The mortgage was signed by both the deceased and their spouse a number of years ago.

The deceased's Will specified that:

· Any monies received from the deceased's Life Insurance Policy are to be applied toward the discharge of the mortgage with the remaining balance, after discharging the said mortgage, being paid to the deceased's residuary estate and being distributed in accordance with the provisions of the deceased's Will.

· The spouse will have the right to reside in the property as a life tenant or until such time as the spouse terminates their right to reside in the property.

· Upon the death of spouse of the deceased the property is to be sold and the net proceeds of sale are to be divided equally between the children of the deceased.

The children of the deceased are not death benefits dependants of the deceased.

The deceased was a member of a superannuation fund (the Fund).

In the 2009-10 income year, the trustee of the deceased estate received a superannuation death benefit from the Fund. The superannuation death benefit comprised:

· a tax taxed element of a taxable component;

· an untaxed element of a taxable component; and

· a tax-free component.

No tax was withheld by the Fund in respect of the superannuation death benefit.

Relevant legislative provisions:

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 Section 302-60.

Income Tax Assessment Act 1997 Section 302-195(1).

Income Tax Assessment Act 1936 Subsection 101A(3).

Income Tax Assessment Act 1997 Section 995-1(1).

Reasons for decision

Summary

The deceased's spouse is a death benefits dependant in accordance with the definition of 'spouse' under subsection 995-1(1) of the ITAA 1997 and the definition of 'death benefits dependant' under subsection 302-195(1).

The deceased's spouse is a joint-debtor of the mortgage with the deceased. Accordingly, the portion of the superannuation death benefits used to discharge the mortgage is being paid for the benefit of the spouse and is not assessable income and is not exempt income in the hands of the trustee of the deceased estate.

The balance of the superannuation death benefits will be distributed in accordance with the provisions of the Will to non-dependants. Accordingly, the Trustee of the deceased estate is subject to tax on any remaining balance of the superannuation death benefits.

Detail reasoning

Superannuation death benefits paid to a trustee of a deceased estate

Under section 302-10 of the ITAA 1997, the taxation treatment of superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with how the benefit would be taxed if paid directly to the person or persons otherwise intended to benefit from the estate.

The benefit is also treated as if it was income to which no beneficiary was entitled, and so any tax payable is paid by the trustee of the estate and does not form part of that death benefits dependant's assessable income (subsection 302-10(2) of the ITAA 1997).

This means that where a death benefits dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be exempt from tax as if it were paid to a death benefits dependant of the deceased. It will not be taxable income of either the estate or the death benefits dependant.

Where a person, who is not a death benefits 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 (subsection 302-10(3) of the ITAA 1997).

In this case, the lump sum superannuation death benefits were paid by a superannuation fund (the Fund) to the Trustee of the deceased estate.

As noted in the facts, the deceased's spouse is a death benefits dependant of the deceased in accordance with the definition of 'spouse' under subsection 995-1(1) of the ITAA 1997 and the definition of 'death benefits dependant' under subsection 302-195(1).

Consequently, as the deceased's spouse is a death benefits dependant, any part of the lump sum superannuation death benefit paid to them will be tax free in accordance with section 302-60 of the ITAA 1997.

However, the other beneficiaries mentioned in the Will are not death benefits dependants of the deceased within the meaning of subsection 302-195(1) of the ITAA 1997.

The extent to which the death benefits dependant of the deceased is benefited from the lump sum superannuation death benefits

The deceased was a sole owner of a residential property. The property has an outstanding mortgage with a bank (the Bank), in the name of both the deceased and his spouse.

As stated in the Will, any money received from the Fund is to be applied toward the discharge of the mortgage with the Bank and any balance remaining is to form part of their residuary estate and be distributed to the deceased's non-dependant children.

Even though the spouse does not, and will never hold the title to the property, monies from the Fund are being paid to discharge the mortgage, for which the deceased's spouse is solely liable to repay. Consequently, the superannuation death benefit from the Fund is being paid for the benefit of the spouse.

Accordingly, the portion of the superannuation death benefits to be used to discharge the mortgage is a death benefits payment from which a dependant of the deceased is benefitting. As a result, this amount is not assessable income and is not exempt income in the hands of the Trustee of the deceased estate.

However, any balance of the payment from the Fund remaining after the mortgage is discharged will form part of the deceased estate that will be distributed in accordance with the provisions of the Will to non-dependants of the deceased. Hence, it follows that the Trustee of the deceased estate is subject to tax on this portion as if the payment had been made to beneficiaries who were not death benefits dependants of the deceased, in accordance with subsection 302-10(3) of the ITAA 1997.

Consequently, the amounts ultimately distributed from the deceased estate to each non-dependant beneficiary will not be taxable in the hands of each recipient, because these amounts will represent distributions of the corpus of the deceased estate.

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