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Ruling

Subject: Death benefits

Question

Can a superannuation benefit paid after the death of the taxpayer be treated as a lump sum superannuation benefit made before the date of death?

Answer

No.

This ruling applies for the following period

1 July 2011 to 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

The deceased was over 70 years of age at the time of their death. The deceased suffered from a terminal illness.

The deceased had an Income Stream Account with their superannuation fund (the fund) which paid a monthly pension.

During the 2011-12 income year, the deceased's financial advisor (on the executor's instructions) sent a benefit payment request form signed by the executor of estate together with a certified copy of the Power of Attorney (Financial) to the fund, instructing them to close the Income Stream account.

The deceased died during the 2011-12 income year. The financial advisor subsequently notified the executor that the fund was hesitant about accepting the Power of Attorney. At that time, the executor notified the financial advisor on the death of the deceased.

After the date of death, the fund sent an exit statement showing the closing account balance amount which was subsequently transferred to the deceased's bank account. The entire amount was treated by the fund as a benefit payment.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 101A(3)

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 Subsection 302-60.

Income Tax Assessment Act 1997 Subsection 302-145(2).

Income Tax Assessment Act 1997 Subsection 302-195.

Income Tax Assessment Act 1997 Section 303-10.

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

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

Reasons for decision

Summary of decision

The superannuation benefit paid by the fund after the date of death of the deceased is a superannuation death benefit made from the fund to the Estate of the deceased (the estate). Therefore, the payment cannot be treated as a lump sum superannuation benefit made before the date of death.

The income tax return lodged by the trustee of the estate for the 2011-12 income year should include the taxed element of the death benefit superannuation lump sum as assessable income which, in accordance with subsection 302-145(2) of the ITAA 1997, is taxed at a rate not exceeding 15% including Medicare levy.

Detailed reasoning

Application of the superannuation death benefit provisions

A superannuation death benefit paid is defined in subsection 307-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) as a payment described in Column 3 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.

Further a superannuation death benefit must be paid as either a superannuation lump sum or a superannuation income stream.

In this case, the deceased, who died in the 2011-12 income year, was a member of a public offer fund. Although their benefits in the fund were paid to them as a member benefit, the payment is treated as a payment to the estate as the member was deceased at the time the payment was made.

Therefore, the payment made by the fund is a superannuation death benefit as defined in Column 3 of Item 1 of the table under subsection 307-5(1) of the ITAA 1997 made to the estate.

The relevant provisions of Division 302 of the ITAA 1997 require examination to determine the tax treatment of the payment.

Application of Subdivision 302-A of the ITAA 1997

As previously mentioned, the payment in this case was made to the estate and accordingly section 302-10 of the ITAA 1997 applies.

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 line with the taxation arrangements that would otherwise apply to the person/s intended to benefit from the estate.

This means that where a death benefit 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 directly to a death benefit dependant of the deceased. However, it is also clear that as the death benefit dependant is not presently entitled to the superannuation death benefit at that time it follows that the death benefit does not form part of the death benefit dependant's assessable income [subsection 302-10(2) of the ITAA 1997 and subsection 101A(3) of the Income Tax Assessment Act 1936 (ITAA 1936)].

Where a person, who is not a death benefit dependant, is expected to receive part or all of a superannuation death benefit, the death benefit will be subject to tax as if it were paid to a non-dependant of the deceased. However, it is also clear that as the non-dependant is not presently entitled to the superannuation death benefit at that time it follows that the death benefit does not form part of the non-dependant's assessable income [subsection 302-10(3) of the ITAA 1997 and subsection 101A(3) of the ITAA 1936].

In this case, the payment is a superannuation death benefit that was made to the estate of the deceased. Documentation provided indicates that the fund did not hold any binding death benefit directions at the time when the income stream account was closed and payment was made.

Therefore, the payment will be assessable as income of the estate in the 2011-12 income year.

Taxation Consequences for the Estate

Subsection 101A(3) of the ITAA 1936 states:

To avoid doubt, if in the year of income an amount is included in the assessable income of a deceased taxpayer under Division 82 or 302 of the Income Tax Assessment Act 1997 in respect of a payment received by the trustee of the estate of the deceased taxpayer, that amount shall be included in the assessable income of that year of income of the trust estate.

Subsection 101A(3) of the ITAA 1936 specifically brings into the assessable income of the trust estate the amount of a superannuation death benefit received after the death of a taxpayer, and provides that the amount is income to which no beneficiary is presently entitled. The result of this provision is that any tax liability raised in respect of the death benefit will be borne by the trustee of the estate rather than the beneficiaries.

In this case, the superannuation payment was a death benefit that was made directly to the estate as there was no binding death benefit direction held by the fund at the time of making the payment. Accordingly, the taxed element of the superannuation death benefit made to the estate is not tax-free.

Taxation of lump sum payments to terminally ill members

The conditions for lump sum superannuation payments to terminally ill members being tax-free are addressed under subsections 303-10(1) and 303-10(2) of the ITAA 1997. Subsection 303-10(1) states:

This section applies to a superannuation member benefit that:

(a) is a superannuation lump sum; and

(b) is:

(i) paid from a complying superannuation plan; or

(ii) a superannuation guarantee payment, a small superannuation account payment, an unclaimed money payment, a superannuation co-contribution benefit payment or a superannuation annuity payment.

However, subsection 303-10(2) states that:

The lump sum is not assessable income and is not exempt income if a terminal medical condition exists in relation to you when you receive the lump sum or within 90 days after you receive it.

The above subsections were inserted into Division 303 of the ITAA 1997 as a result of amendments contained in the Tax Laws Amendment (2008 Measures No.2) Act 2008 to make lump superannuation payments tax-free when paid to an individual member with a terminal medical condition.

Further, the fact that the payment must be made to a person with a terminal condition is mentioned in paragraph 14.3 of Chapter 7 in the Revised Explanatory Memorandum - SEN to Tax Laws Amendment (2008 Measures No.2) Act 2008 which states:

14.3 These amendments provide that a superannuation lump sum paid from either a taxed or an untaxed source to a person with a terminal medical condition is tax free.

The facts of this case show that, although the deceased was in the process of getting their financial affairs in order prior to their death and that their terminal illness was hampering this process, the lump sum payment was made after the deceased's death.

Accordingly, the payment, a superannuation death benefit, cannot be viewed as a payment from the fund to the deceased made prior to the date of death but as a payment of the deceased's benefits from the fund to the estate which will ultimately be distributed to non-dependant beneficiaries.

As the payment was made after the deceased's death and it was paid to the estate, the lump sum payment is not tax-free under section 303-10 of the ITAA 1997 or any other provision under the legislation.

Conclusion:

The income tax return lodged by the trustee of the estate for the 2011-12 income year should include the taxed element of the death benefit superannuation lump sum as assessable income which, in accordance with subsection 302-145(2) of the ITAA 1997, is taxed at a rate not exceeding 15% including Medicare levy.

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