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Edited version of private ruling

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Ruling

Subject: Superannuation death benefit - dependents

Question

Will the income derived from a superannuation death benefit paid to dependant minor children be treated as excepted income and hence be taxed at normal rates when received by the individual minor beneficiaries?

Answer

Yes

Relevant facts and circumstances

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are:

B died and is survived by C and minor children. C is the executor of the deceased estate.

The superannuation death benefit consists of predominantly concessional contributions and is paid as a lump sum into a testamentary trust established under the will.

The superannuation funds will be quarantined in an investment account and held in trust for the three minor dependent children of the deceased.

C will be trustee of this account. The purpose of the account is to generate investment income to support the children's general upkeep and education.

The will provides the executors with discretionary powers when dealing with death benefits.

The trustee does not wish to create a formal trust deed in relation to this account.

Income and capital gains derived on the funds in the investment account will be shared equally by the minor children.

Reasons for decision

Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936) ensures that special rates of tax and a lower tax-free threshold apply in working out the basic income tax liability on taxable income, other than excepted income, derived by a prescribed person. 

A prescribed person is defined in subsection 102AC(1) of the ITAA 1936 to mean any person, other than an excepted person (as defined in subsection 102AC(2) of the ITAA 1936), who is under 18 years of age on the last day of the income year. 

Based on the information submitted, the minor beneficiaries, being the children of the deceased, do not qualify as excepted persons as defined in subsection 102AC(2) of the ITAA 1936 who are under 18 years of age on the last day of the income year. Therefore they are prescribed persons for the purposes of Division 6AA of the ITAA 1936.

Division 6AA of the ITAA 1936 will apply, where the minor beneficiaries are "prescribed persons, to so much of the beneficiaries' shares of the net income of the trust that is not "excepted trust income" (subsection 102AG (1) of the ITAA 1936).

Subsection 102AG(2) of the ITAA 1936 lists the various types of "excepted trust income" of a trust estate that may be derived by a trustee on behalf of the minor beneficiaries. Assessable income derived by the trustee of the trust estate from the investment of any property transferred to the trustee for the benefit of the beneficiaries directly as a result of the death of a person that is paid out of a provident, benefit, superannuation or retirement fund is listed as "excepted trust income" (subparagraph 102AG(2)(c)(v)of the ITAA 1936).

Therefore, the income distributed from a testamentary trust to a beneficiary of the trust who is also a prescribed person is excepted trust income under subsection 102AG(2) of the ITAA 1936.

In your case, the income in the investment account will be derived from a superannuation death benefit. Therefore the distribution of income from the trust to the minor beneficiaries is excepted assessable income and is not assessable under the special rules of Div 6AA of the ITAA 1936. The income is assessed as per normal tax rates set out in Schedule 7 of the Income Tax Rates Act 1986.

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