Edited version of your written advice

Authorisation Number: 1012846652173

Date of advice: 23 July 2015

Ruling

Subject: Deceased estate

Question 1

Is the money from the term deposit and savings account assessable income?

Answer 

No.

Question 2

Is the compensation payment assessable income?

Answer 

No.

Question 3

Are the lump sum superannuation death benefits assessable income?

Answer 

No.

Question 4

Is the capital gain or capital loss made from sale of your main residence disregarded?

Answer 

Yes.

This ruling applies for the following periods

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commenced on

1 July 2010

Relevant facts

Your relation died.

You and your spouse are the beneficiaries of the estate.

Your relation's assets included term deposits, savings account and superannuation.

You also received lump sum compensation from a compulsory third party claim.

You are executor for the estate.

The term deposits and savings account were closed shortly after the death of your relation. The funds from these accounts went to the estate and shortly after you received your share of the funds.

Your share of the lump sum superannuation death benefit from entity A was paid directly to you.

The lump sum superannuation death benefit from entity B was paid to the estate account and then transferred to you and your spouse.

You state that the superannuation funds treated you as being in an interdependency relationship with your late relation.

The deceased estate has been finalised.

You have sold your main residence. The residence was owned by you and your spouse. The property was not used as a rental property and is less than 2 hectares.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Subdivision 118-B.

Income Tax Assessment Act 1997 section 302-10.

Income Tax Assessment Act 1997 section 302-60.

Income Tax Assessment Act 1997 section 302-195.

Income Tax Assessment Act 1997 section 302-200.

Reasons for decision

On the death of a person, the property of the deceased passes to their estate and legal control is exercised by an executor or administrator.

Taxation Ruling IT 2622 Income tax : present entitlement during the stages of administration of deceased estates discusses tax issues in relation to a deceased estate and deals with the issue of who is presently entitled to the income of the deceased estate during the stages of administration.

In your situation, the deceased estate is finalised and you and your spouse are the beneficiaries.

We therefore need to determine if any of the amounts from the deceased estate are assessable income.

Ordinary income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

A distribution of corpus received from a deceased estate is not considered to be ordinary income and therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Statutory income

Section 6-10 of the ITAA 1997 provides that amounts that are not ordinary income but are included in assessable income by another provision, are called statutory income and are also included in assessable income.

The distribution of the money from the term deposits and bank account is regarded as a distribution of corpus or capital amount. Corpus from a deceased estate is not assessable income (subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

Furthermore, there are no capital gains tax (CGT) consequences under the CGT provisions in relation to a distribution or entitlement of the corpus of a deceased estate.

Therefore, the money from the term deposits and savings account is not regarded as ordinary or statutory assessable income under the ITAA 1936 or ITAA 1997.

Compensation

Ordinary assessable income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

• are earned,

• are expected,

• are relied upon, and

• have an element of periodicity, recurrence or regularity.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82).

Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

On the other hand, if the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

The lump sum compensation payment you received is not earned by you as it does not relate to services performed. Rather the lump sum was received on the finalisation of a third party claim following the death of your relation. The payment is a one-off payment and thus does not have an element of recurrence or regularity. Although the payment can be said to be expected, and perhaps relied upon, this expectation does not arise from any personal services performed.

Thus, the lump sum payment is not ordinary income and is therefore not assessable under subsection 6-5(2) of the ITAA 1997.

Amounts received as a lump sum are generally capital in nature and are potentially taxable as statutory income under the capital gains tax (CGT) provisions of the ITAA 1997.

However, paragraph 118-37(1)(b) of the ITAA 1997 disregards a capital gain or capital loss made in relation to compensation received for any wrong or injury you or your relative suffers personally.

The compensation lump sum you received is not included in your assessable income under the CGT provisions or any other taxation provision.

The lump sum is not ordinary income and is not statutory income. Subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary or statutory income it is not assessable income. Consequently no part of the amount you received is included in your assessable income. Therefore your payment is not included on your tax return.

Superannuation death benefits

Division 302 of the ITAA 1997 sets out the taxation arrangements that apply to the payment of superannuation death benefits.

Section 302-195 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.

As paragraphs (a) (b) or (d) of the above definition do not apply to you, it must be shown that, for you to be a death benefits dependant, you were in an interdependency relationship with the deceased (paragraph 302-195(c) of the ITAA 1997).

The information provided shows and indicates that the superannuation death benefits you received were paid as they considered you to be in an interdependency relationship with your late relation.

Accordingly, it is accepted that you are a death benefits dependant of the deceased within the definition in section 302-195 of the ITAA 1997.

Section 302-60 of the ITAA 1997 provides that a superannuation lump sum that you receive because of the death of a person of whom you are a death benefits dependant is not assessable income and is not exempt income.

Accordingly, the superannuation death benefit you received from entity A is not assessable income and not included in your tax return.

Section 302-10 of ITAA 1997 applies to superannuation death benefits paid to the trustee of a deceased estate.

Relevant to the present case is subsection 302-10(2) of the ITAA 1997 which states:

To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, 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.

In other words, the same amount of tax is paid from a superannuation death benefit to an individual via a deceased estate as if it had been paid directly to the individual.

In the present case, entity B made a superannuation death benefit payment to your relation's estate. This was then transferred to you and your spouse.

The superannuation death benefit paid to your relation's estate is treated as if it were paid to directly to you.

As you are a death benefits dependant, as previously discussed, the superannuation death benefit you received from entity B, which was transferred to you from your relation's estate is not assessable income. Accordingly, none of this payment is to be included in your tax return.

Main residence exemption

Under subdivision 118-B of the ITAA 1997 you can disregard a capital gain or capital loss that happens to a dwelling that is a main residence where certain conditions are met.

To get the full exemption:

• the dwelling must have been your home for the whole period you owned it

• you must not have used the dwelling to produce assessable income, and

• any land on which the dwelling is situated must be 2 hectares or less.

In your case, any capital gain or capital loss made on the sale of your main residence is disregarded and not included as assessable income on your tax return.

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