Edited version of your written advice

Authorisation Number: 1013046086790

Date of advice: 5 July 2016

Ruling

Subject: Superannuation death benefit

Question

Is the superannuation death benefit paid to the estate of the Deceased treated under subsection 302-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) if the Deceased's spouse was a death benefits dependant of the Deceased but passed away before the superannuation death benefit was paid to the estate?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances:

The Deceased died in late 20WW.

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

According to the Deceased's will, the residue of the estate was left to their spouse.

In late 20WW an application was made to the Fund for the death benefit payment to be made to the spouse.

In early 20XX the spouse died.

In late 20YY a grant of probate of the estate of the Deceased (the Deceased's Estate) was obtained.

In early 20ZZ the Fund made a superannuation death benefit payment to the trustee for the Deceased's estate.

The PAYG payment summary from the Fund shows a superannuation lump sum was paid, which comprised a taxed element and a tax-free component.

The death benefit payment will be distributed to the trustee for the estate of the Deceased's spouse and then ultimately, to non-dependant beneficiaries.

Relevant legislative provisions

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 302-140

Income Tax Assessment Act 1997 Section 302-145

Income Tax Assessment Act 1997 Section 302-195

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Subsection 307-5(1)

Income Tax Assessment Act 1997 Subsection 307-5(4)

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 307-70

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Summary

A payment made by a superannuation fund to a deceased estate after the death of the deceased is assessed as a death benefit under section 302-10 of the ITAA 1997. In this case, the death benefit is treated as if it had been paid to a person who was not a death benefits dependant of the deceased.

As the trustee for the Deceased's Estate has received a superannuation death benefit, the benefit is taken to be income to which no beneficiary is presently entitled and the trustee is liable to pay tax on that income.

When an amount is distributed to the trustee for the estate of the Deceased's spouse and ultimately distributed to non-dependant beneficiaries, it is an amount of capital and is not assessable income.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 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.

A superannuation death benefit must be paid as either:

• a superannuation lump sum; or

• a superannuation income stream.

A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70 of the ITAA 1997.

The Deceased died in the 20WW-XX income year. A superannuation death benefit was paid to the Deceased's Estate in early 20ZZ.

The benefit was made to the Deceased's Estate during the 20YY-ZZ income year from the Fund after the Deceased's death, because the Deceased was a member of the Fund. Hence, this payment is a superannuation benefit within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997. This benefit is a superannuation death benefit as defined in subsection 307-5(4) of the ITAA 1997.

The superannuation benefit is a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997 and the provisions of Division 302 of the ITAA 1997 apply to the benefit.

Application of section 302-10 of the ITAA 1997

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 was a superannuation death benefit received from the Fund by the Trustee of the Deceased's Estate, section 302-10 of the ITAA 1997 will apply to the Trustee of the Deceased's Estate.

The taxation arrangements that apply to this superannuation death benefit are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate.

Application of subsections 302-10(2) and 302-10(3) of the ITAA 1997

Subsection 302-10(2) of the ITAA 1997 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.

Under subsection 302-10(2) of the ITAA 1997 where a dependant of the deceased receives or is expected to receive part or all of a superannuation death benefit and has benefited, or may be expected to benefit, the trustee of the estate will be subject to tax on that part of the benefit paid or to be paid to the dependant as if it were paid to a dependant of the deceased. However, the dependant is not presently entitled to this superannuation death benefit at this time and the benefit therefore does not form part of his or her assessable income.

Subsection 302-10(3) of the ITAA 1997 states:

To the extent that 1 or more beneficiaries of the estate who were not 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 not a death benefits dependant of the deceased; and

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

Under subsection 302-10(3) of the ITAA 1997 where a non-dependant of the deceased receives or is expected to receive part or all of a superannuation death benefit and has benefited, or is expected to benefit, the trustee will be subject to tax on that part of the benefit paid or to be paid to the non-dependant as if it were paid to a non-dependant of the deceased.

Similarly, the non-dependant is not presently entitled to this superannuation death benefit at this time and the benefit therefore does not form part of his or her assessable income.

For the purposes of these taxation arrangements it is necessary to determine whether the beneficiary is a death benefits dependant of the deceased.

'Death Benefits Dependant' in relation to the Superannuation Death Benefit

Subsection 995-1(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195 of the ITAA 1997. Section 302-195 of the ITAA 1997 defines a 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.

Application to the facts of this case

In this case, while it is true that the spouse of the Deceased was (prior to their death), a death benefits dependant of the Deceased, they were not a beneficiary who has benefited, or may be expected to benefit, from the superannuation death benefit. The superannuation death benefit was paid by the Fund in early 20ZZ while the Deceased's spouse died in early 20XX. As their death pre-dates the superannuation death benefit, it is impossible for them to benefit from it. As such, subsection 302-10(2) of the ITAA 1997 has no application in this case. The fact that an application was made to the Fund in late 20WW is not a relevant consideration. As previously outlined, section 302-10 of the ITAA 1997 only begins to apply once the trustee has received the superannuation death benefit.

Instead, the superannuation death benefit should be taxed in accordance with subsection 302-10(3) of the ITAA 1997. This is because only non-dependants are expected to benefit from the superannuation death benefit. Therefore, the death benefit is to be taxed in the hands of the Deceased's Estate as if it had been paid to a person who was not a death benefits dependant of the Deceased.

Death benefits to a non-dependant:

The tax free component of a superannuation lump sum paid to a non-dependant is tax free under section 302-140 of the ITAA 1997.

The taxable component of the lump sum is included in assessable income, with a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15%. This is in accordance with section 302-145 of the ITAA 1997. No Medicare levy is added to the rates mentioned above.

In this case, as only non-dependant beneficiaries are expected to benefit from the superannuation death benefit, the superannuation benefit will be taxed as explained above, in the hands of the Deceased's Estate.

When eventually an amount is paid from the Deceased's Estate to the estate of the Deceased's spouse, that amount is not to be included in the latter estate's assessable income because it represents a distribution of the corpus (or capital) of the Deceased's estate.

Similarly, when an amount is paid from the fully administered estate of the Deceased's spouse to any non-dependant beneficiaries, that amount is also a distribution of capital and not included in their assessable income

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