Edited version of your written advice

Authorisation Number: 1012790678476

Ruling

Subject: Superannuation death benefit

Questions

1. Do subdivisions 302-B and 302-C of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the executor by virtue of section 302-10 of the ITAA 1997?

2. Will the grandchildren of the deceased, who are beneficiaries, be regarded as having benefited from the superannuation death benefit for the purposes of section 302-10 of the ITAA 1997 notwithstanding the funds will be held in trust until they reach a specified age?

3. Does the proportioning rule under section 307-125 of the ITAA 1997 apply to the payment of the superannuation death benefit from the superannuation fund to the executor?

Answers

1. Yes

2. Yes

3. Yes

This ruling applies for the following period:

Income year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

The deceased died during the 2014-15 income year.

Soon after, the executor of the deceased's estate received a superannuation death benefit comprised of a tax-free component and a taxable component.

The value of the estate is principally made up of the superannuation death benefit.

According to the deceased's will, the executor is to pay a set percentage of the value of the deceased's estate to certain beneficiaries, which includes the deceased's grandchildren.

The will specifies that this gift of money to the deceased's grandchildren is not to occur until they attain a specified age.

The will states that the executor is to consider the most cost effective manner of dealing with estate's assets and that the executor may pay a greater part of any asset, benefit or class of asset or benefits to a particular beneficiary or trust established under the will.

The executor wishes to source the distribution to the beneficiaries who are not death benefits dependants from the tax-free component and source the distribution to the beneficiaries who are death benefits dependants from the taxable component.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 302-B

Income Tax Assessment Act 1997 Subdivision 302-C

Income Tax Assessment Act 1997 Section 302-10

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

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 Subsection 302-195(1)

Income Tax Assessment Act 1997 Paragraph 302-195(1)(a)

Income Tax Assessment Act 1997 Paragraph 302-195(1)(b)

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 307-125

Income Tax Assessment Act 1997 Subsection 307-125(2)

Reasons for decision

Summary

Section 302-10 of the ITAA 1997 applies to the executor in such a way so that the taxation of the superannuation death benefit will effectively be governed by subdivisions 302-B and 302-C of the ITAA 1997.

The grandchildren of the deceased may be expected to benefit from the superannuation death benefit for the purposes of section 302-10 of the ITAA 1997 as they have a vested and indefeasible interest in the amounts set aside and held in trust until they attain a specified age.

The proportioning rule applies to the payment of the superannuation death benefit from the superannuation fund to the executor due to the operation of section 307-125 of the ITAA 1997.

Detailed reasoning

Death benefits paid to the trustee of a deceased estate

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 payment in this case was a superannuation death benefit received by the trustee of the deceased estate, section 302-10 of the ITAA 1997 will apply to the executor.

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 whether the beneficiaries were or were not death benefit dependants of the deceased.

Effectively, where beneficiaries who are dependants of the deceased are expected to receive part or all of a superannuation death benefit, that part of the death benefit will be subject to tax in the hands of the executor as if the executor was a dependant of the deceased.

According to section 302-60 of the ITAA 1997, superannuation death benefit lump sums received by a dependant is not assessable income and is not exempt income.

Similarly, where beneficiaries who are not dependants of the deceased are expected to receive part or all of a superannuation death benefit, that part of the death benefit will be subject to tax in the hands of the executor as if the executor was not a dependant of the deceased.

According to subdivision 302-C of the ITAA 1997, if a death benefit lump sum is received by someone who is not a dependant, the tax-free component will be tax free while the taxable component of the benefit will be assessable income in the year of receipt. An offset will apply 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%.

In either scenario, the benefit is taken to be income to which no beneficiary is presently entitled.

Application of section 302-10 of the ITAA 1997 in relation to future distributions

It is important to note that subsections 302-10(2) and 302-10(3) of the ITAA 1997 refer to beneficiaries who "have benefited, or may be expected to benefit, from the superannuation death benefit." The use of the phrase "may be expected to benefit" connotes something that is less than absolute certainty. The beneficiary in question does not have to have already benefited from the death benefit. It is enough that the beneficiary can be reasonably expected to benefit.

In the current case, the gift of money to the deceased's grandchildren outlined in the will requires the deceased's grandchildren to attain a specified age. Until this occurs, the amount will be set aside by the executor and held in trust. As the grandchildren have a vested and indefeasible interest in the amounts held in trust, it is reasonable to say that the grandchildren may be expected to benefit from the superannuation death benefit.

According to subsection 302-195(1) of the ITAA 1997, a death benefits dependant is defined as:

(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 had an interdependency relationship under 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

In relation to the grandchildren, paragraphs 302-195(1)(a) and 302-195(1)(b) of the ITAA 1997 are not relevant to the present case. As such, if the grandchildren are determined to be in an interdependency relationship with the deceased just before the deceased died or are determined to be financially dependent on the deceased just before the deceased died, then subsection 302-10(2) of the ITAA 1997 will apply to treat the corresponding portion of the death benefit received by the executor as if the executor was a death benefits dependant of the deceased. Otherwise, subsection 302-10(3) of the ITAA 1997 will apply to treat the portion of the death benefit as if the executor was not a death benefits dependant of the deceased.

The proportioning rule

While the proportioning rule does not apply to distributions made by the executor to the beneficiaries, the "proportioning rule" does apply to the payment of the superannuation death benefit to the executor in the present case. This is because the proportioning rule applies to the payment of all superannuation benefits.

The proportioning rule is outlined in subsection 307-125(2) of the ITAA 1997, which states:

(2) The superannuation benefit is taken to be paid in a way such that each of those components of the benefit bears the same proportion to the amount of the benefit that the corresponding component of the superannuation interest bears to the value of the superannuation interest.

As such, when the death benefit is received by the executor from the deceased's superannuation fund, the death benefit is already split up into a taxable component and a tax-free component due to the operation of the rule.

The tax treatment of the superannuation death benefit

The tax treatment of the superannuation death benefit in the hands of the executor is determined by the operation of subsections 302-10(2) and 302-10(3) of the ITAA 1997. These subsections state that:

(2) To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefitted, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

(3) To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefitted, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled. [emphasis added]

The above subsections do not have the effect of putting the executor in the shoes of the beneficiary in determining whether the executor is liable for tax in respect of superannuation death benefits received. Instead, the subsections operate to treat a portion of the death benefit as if the executor was a death benefits dependant and a portion of the death benefit as if the executor was not a death benefits dependant. This is the case regardless of any powers of appropriation accorded to the executor by the will.

The portion to be paid to dependants is tax free in the hands of the executor in accordance with section 302-60 of the ITAA 1997. The portion to the paid to non-dependants is taxed in accordance with the rules outlined in subdivision 302-C of the ITAA 1997, which states that the taxable component of the received benefit is assessable. The size of these respective portions depends on how much of the death benefit is paid, or expected to be paid, to dependants and non-dependants.

When the death benefit is received by the executor from the deceased's superannuation fund, the death benefit is already split up into a taxable component and a tax-free component. This is due to the operation of the proportioning rule discussed earlier. In other words the executor in this case, if it is treated as a non-dependant under subsection 302-10(3) of the ITAA 1997, will receive a taxable component from the superannuation fund.

According to the facts in the present case, a proportion of the death benefit is the tax free component while a proportion of the death benefit is the taxable component. As such, any portion of the death benefit that we must treat as being paid to the executor as a person who was not a death benefits dependant must be taken to be paid in a way such that the components bear the same proportion.

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