Edited version of your written advice

Authorisation Number: 1013077508850

Date of advice: 24 August 2016

Ruling

Subject: Whether a payment was made 'as soon as practicable'.

Question 1

Whether the Trustee of a Deceased Estate has made a payment to the Estate 'as soon as practicable'?

Answer 1

Yes

This Ruling applies for the following period

Income year ending 30 June 2016.

The scheme commences on

1 July 20BB.

Relevant facts and circumstances

Your client is the trustee (the Trustee) for a superannuation fund (the Fund).

The Fund had a sole member (the Deceased Member) who prior to their death in the 20YY-ZZ income year was taking an account based pension from the Fund.

In 20XX the Deceased Member was admitted to hospital.

In 20XX the Deceased Member executed a binding death benefit nomination wholly in favour of their estate (the Estate).

In 20XX the Deceased Member underwent an emergency operation.

Due to the Deceased Member's ill health the Deceased Member's relatives were appointed the directors of the Trustee.

Around this time, the Deceased Member also executed a power of attorney in favour of their relatives.

Upon the Deceased Member recovering, they were reappointed a director in place of the relative and remained a director together with the relative until their death.

Under the Deceased Member's Will (the Will), the relatives were appointed the executors.

In 20YY the Deceased Member was admitted to an aged care facility where they resided until their death.

Prior to the decline of the Deceased Member's health, they actively managed the investment portfolio for the Fund. This involved:

• maintaining the Fund's day to day investment records; and

• updating a number of spreadsheets on a daily basis to record the Fund's receipts and expenses and generate basic financial reports for the Fund.

The Deceased Member kept the above records and spreadsheets at their home and brought them to meetings with the Fund's accountants (the Accountants) when required.

After the Deceased Member experienced their illness, their memory loss meant they were unable to attend meetings with, or instruct, the Accountants with regard to the movements within the Fund's investments and in estimating market values.

As the relative resided interstate, the relative was left with administering the Estate which was complicated for the following reasons.

• the administrative issues associated with the Fund's bank accounts;

• the issues associated with contacting the unlisted unit trust investees of the Fund;

• the administrative and accounting issues associated with redeeming and/or liquidating the unlisted unit trust investments of the Fund;

• the issues associated with contacting;

• the mortgage loan investees of the Fund;

• the administrative and accounting issues associated with redeeming and/or liquidating the mortgage loan investments of the Fund;

• the issues associated with class action litigation associated with the Fund's investments; and

• the need to comply with superannuation law with regards to payments of death benefits from the Fund.

No amounts other than the investment earnings have been added to the Fund on or after the date of the Deceased Member's death.

Probate of the Deceased Member's Estate was granted in 20AA.

In 20BB the Fund made an interim payment comprising of a cash amount to the Estate (interim payment).

The Fund had held numerous investments and the process of communicating with each investee was onerous, particularly given the legal incapacity of some of the investees.

The Fund maintained a number of bank accounts and term deposits with different banking institutions. The Deceased Member was the only signatory and contact person listed for each banking institution.

The Accountants found difficulty in obtaining information for the Fund's bank accounts and term deposits as the banking institutions refused to communicate with the Accountants. In addition, each banking institution required a copy of the grant of Probate before liaising with the director of the Trustee.

After a period of time, the director of the Trustee was able to effectively communicate with the right staff members and pool the relevant funds into a single bank account in order to facilitate a single cash payment from the Fund to the Estate.

During the Deceased Member's lifetime the Fund maintained a large portfolio of investments in non-listed Australian companies and unit trusts.

Following the Deceased Member's death, due to the nature and history of the Fund's portfolio, the Accountants encountered difficulty determining the market value of the fund's investments, locating the name and contact details of each responsible entity for the investments and redemption of each investment.

A substantial proportion of the Fund's investments were in loans secured by first mortgages over real property.

As a result of the GFC, many of the borrowers under the abovementioned mortgage investments defaulted on their obligations. A number of mortgage managers and/or trustees were placed under insolvency administration. This led to the appointment of another manager and/or trustee and the commencement of recovery proceedings which have lasted for five years or more. In addition, natural disaster had caused significant damage to the properties secured by first mortgage.

As a result of the natural disaster, uncertainties arose as to the market values of the Fund's investments in mortgage loans. In this respect, communications with the Fund's insurers also created difficulties as there was uncertainty as to whether the fund was able to claim insurance proceeds. As such, following the Deceased Member's death, the Accountants experienced difficulties in determining the market value of each mortgage loan as well as determining whether each loan should be written off.

Following the GFC, a number of class action recovery proceedings were commenced against management personnel of the investees the Fund had invested in. By virtue of Australian law, the Fund was automatically included as a potential claimant under each class action.

Currently, the Fund is involved in one class action as a potential claimant that it is aware of. However, given the large number of underperforming investments, it is possible that the Fund may be involved in a number of class action proceedings that the director of the Trustee and the Accountants are not aware of. This has created difficulty for the director of the Trustee in determining whether the Fund should continue to pursue its legal right as a claimant under the class actions, or transfer the investments to the Estate without the right to benefit under any recovery settlement or judgment.

Consequently:

• the Applicant proposes that the Trustee of the Fund will make a final payment to the Estate. This payment will be made on or prior to 30 June 2016 or for such later period as required to obtain the Commissioner's ruling; and

• as the Trustee still does not have the documents requested from the investees to transfer any non-cash assets in specie, it proposes to declare a trust over these remaining investments in favour of the Estate. This will occur simultaneously with making a cash payment of the cash benefits the Fund currently holds. The payment will be accompanied by the provision of copies of all documents and records to the Estate relating to the remaining investments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-15

Income Tax Assessment Act 1997 Section 292-90

Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 Explanatory Statement

Income Tax Assessment Regulations 1997 Regulation 995-1 .01(3)

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.21(2)

Reasons for decision

Summary

The proposed payment will be regarded as having been made 'as soon as it was practicable' following the Deceased Member's death. As such the proposed payment will be considered a payment of a superannuation income stream benefit.

Detailed reasoning

Superannuation Income Stream Benefit

The ITAA 1997 defines "superannuation income stream benefit" with reference to the Income Tax Assessment Regulations 1997 (ITAR 1997). The meaning of superannuation income stream benefit is set out in regulation 995-1.01.

Regulation 995-1.01(3) of the 1997 Income Tax Assessment Regulations 1997 provides:

(3) For the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act, if:

(a) a superannuation death benefit that is a superannuation lump sum is paid after the death of a person (the deceased) using only an amount from a superannuation interest; and

(b) immediately before the deceased's death, the superannuation interest was supporting a superannuation income stream payable to the deceased; and

(c)  the superannuation income stream did not automatically revert to another person on the death of the deceased;

the amount paid as the superannuation lump sum, to the extent it is not attributable to any amount (other than investment earnings) added to the superannuation interest on or after the deceased's death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased's death until as soon as it was practicable to pay the superannuation lump sum.

In other words, where a death benefit is paid using only an amount from the deceased interest that previously supported a pension (and the interest was not reversionary) then the payment will be considered a payment of the original income stream benefit. This is on the condition that no other amounts (apart from investment earnings) have been added to the superannuation interest following the member's death, as is the case here.

However, the payment will only be a superannuation income stream benefit for the period between the member's death and 'as soon as it was practicable to pay the superannuation lump sum.'

The Explanatory Statement to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (the ES) gives an example which explains this. Example 3 of the ES states:

Arthur was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 September 2012. The income stream did not automatically revert to another person on Arthur's death and no amounts (other than investment earnings) were added on or after his death to the superannuation interest that was supporting the income stream.

After undertaking a claims staking process, the trustee of the fund determined that the entire value of the deceased member's benefits in the fund would be paid to the deceased's widow as a lump sum. On 20 December 2012, which was in the circumstances as soon as practicable after Arthur's death, a single lump sum of $100,000 was paid to the widow using only an amount from the relevant superannuation interest.

For the purposes of the earnings tax exemption, the $100,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2012 until 20 December 2012.

As Soon As Practicable

The words 'as soon as it was practicable' are not defined in the income tax legislation.

The Oxford English Dictionary defines "practicable" as meaning "able to be done or put into practice successfully".

The Australian Macquarie Dictionary defines the term as "capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible".

The Explanatory Statement to the to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (Cth) provides a number of examples of where, notwithstanding delay, the payment of a superannuation death benefit will be made "as soon as it was practicable" after a member's death.

You provided the following as examples of delays to include:

• where the trustee of a superannuation fund was required to determine the value of the Deceased Member's benefits

• where the trustee of a superannuation fund experienced difficulties in making contact with a beneficiary of a death benefit payment; and

• where the trustee of a superannuation fund sought advice as to the form of death benefit payments to be made to a beneficiary

General Observations

You explained that a multiplicity of factors have hampered and delayed the Taxpayer from making the payment of the Deceased Member's death benefits to the Estate in a timely manner.

The issue to be addressed is whether the proposed payment will have been made as soon as it was practicable following the Deceased Member's death. You state that numerous factors have impacted on the Fund's ability to make the payments any earlier, as follows.

Nature of Investments and Impact of GFC

The Fund's investments largely comprised of mortgage loans and investments in unlisted trusts and companies.

The GFC had a significant impact on the Trustee's ability to redeem or otherwise "cash out" of these investments. Whilst the GFC may have been significant for many superannuation funds, it could be expected that it was particularly significant for those who had invested in unlisted managed investments given that these types of investments are relatively illiquid.

In the context of this matter, the managers/investees often became insolvent or were under administration and it became a significant exercise for the Trustee and the Accountants to even locate the responsible persons for managing the investments.

The absence of a secondary market for the investments and the fact that they were not listed also presented problems in properly accounting for the investments as the Trustee was obliged to do so at market value.

You contend that these issues were only compounded by the fact that after the Deceased Member's death, there was no one with practical knowledge of the particular investments themselves.

Previous Reliance on the Deceased

The Deceased Member had significant input into the management of the Trustee and took an active involvement in management of its investments.

It was the combination of the Deceased Member's management of the investments and the Accountants appropriately assisting them that allowed for proper records to be kept of the various investments.

This situation changed as the Deceased Member's health deteriorated. The Deceased Member's operation and treatment meant that they were unable to manage the Fund in the manner in which the Deceased Member and the Accountants had become accustomed to. These problems were only exacerbated following their death.

The relative, who became the sole director of the Trustee, had no personal knowledge or insight into the investments.

Whilst the Accountants had some familiarity with the investments, clearly the Accountants were not in a position of being provided with the same management support that the Accountants had received during the Deceased Member's life (for example, the Accountants no longer received daily investment records, spreadsheets or had access to the Deceased Member's personal knowledge of the Fund's investments).

The GFC only made the absence of the Deceased Member's management skills and input more difficult for The Trustee in continuing to manage the investments. This directly impacted on finalising the affairs of the Fund so that it could make the necessary payments to the Estate.

Inactivity and Lack of Responsiveness of lnvestees and Bankers

The investees of the various investments were often insolvent or under administration. This has certainly not assisted the Trustee in redeeming or liquidating the various investments.

The initial process of changing the contact person for each investee was lengthy. This caused considerable delay for the relative and the Accountants in their ability to deal with the Fund's investments in an expeditious manner. Further delays were experienced when different management personnel were appointed as a result of a number of investees being placed in liquidation, receivership or administration.

A number of unsuccessful attempts were made from the date of the Deceased Member's death to present to seek information from the investees with regards to investment market values, redeeming and/or transferring the Fund's investments. The letters, and the responses, as provided exemplify the difficulties associated with communicating with the investees.

In the absence of adequate responses from the investees, the Trustee has been unable to deal with the investments in manner which would allow it to make a final death benefit payment to the Estate. This delay has been unavoidable.

Where the Fund has been able to redeem or liquidate an investment, it has nonetheless been restricted from paying the proceeds as a death benefit to the Estate due to the restrictions under the relevant superannuation legislation.

The Fund also held money in various banks in term deposits.

Although there was no issue of the GFC impacting on these amounts, the Accountants and the Trustee still experienced considerable difficulties and delays in consolidating all of the cash held in various bank accounts into the one bank account.

You have noted that the relevant banking institutions would often not provide the necessary information on the basis that they did not consider either the Accountants or the Trustee to have the requisite authority.

The Fund held a number of accounts with several banking institutions as at the Deceased Member's date of death. In addition to the paperwork prepared by the Accountants, the relative's identity was required to be physically verified at each bank. As provided above, this was an onerous process. Due to the impracticalities associated with the timing and length of such procedures, the process of transferring the Fund's cash balances into a single bank account was considerably drawn-out.

You advised that as part of the identification procedure, upon contact with the banks via telephone call, a number of bank staff would pass any enquiries onto their estates departments. This inconvenience further prolonged the ability for transfer the cash balances into a single bank account.

Resources Required to Attend to Trustee Duties

You state that the facts explain the need for considerable resources in dealing with the various investments of the Fund and preparing the Fund for making the payments to the Estate.

The burden of this largely fell on the relative as the sole director of The Trustee.

The relative has not been remunerated for this work and has had to manage the process over and above other commitments.

Whilst the Accountants have been remunerated for the work performed there has been considerable clerical work required that has been an extra demand on the Accountants' resources and time.

With regard to capital losses you contend the following.

• Prior to the Deceased Member's death the Fund had not elected to claim a capital loss in respect of the investments for which a liquidator/administrator's declaration had been made.

• Due to this situation, the capital loss relating to the investments realisation arose at the time of the investment's disposal. In many instances there was no consideration for the disposal of the investments. In these circumstances, the time of disposal for capital gains tax purposes is taken to have occurred when the investment ceased to exist. For example, at the time of formal completion of the liquidation of a company.

• There have been considerable difficulties in being able to successfully communicate with the investees. Therefore, the Accountants experienced prolonged delays in obtaining the requisite information needed to identify the date on which the abovementioned capital losses arose.

• In addition, due to the complex nature of the Fund's investments, the Accountants experienced difficulties in determining whether the losses on investments were capital losses as governed by the capital gains tax regime of the ITAA 1997, or a loss on disposal of a traditional security as governed under the Income Tax Assessment Act 1936.

1. With regard to the complexity of legal issues for the Trustee you contend the following.

• In addition to seeking accounting advice and support, the Trustee has also needed to seek legal advice on a number of issues.

• These legal issues have included the minimum payments to be made as a death benefit for a complying fund under superannuation law, taxation issues relating to realisation of assets and other practical superannuation law issues in finalising the administration of the Fund and making the payment to the Estate.

• This has further drawn out the process of finalising the administration of the Fund and making the necessary payments.

• A specific restriction under superannuation law is that superannuation death benefits can only be paid from a superannuation fund as a single lump sum or as both an interim and final lump sum.

• The interim payment was made in 20BB.

• Therefore, in accordance with superannuation law, the final payment from the Fund to the Estate must comprise of all the remaining cash balances and/or investments.

• Due to the legislative restriction, the Trustee has been unable to pay the cash amounts received from the redemption and/or liquidation of investments as and when they have been received. Given the multitude of issues surrounding the redemption and/or liquidation of each investment, this restriction has further contributed to the delay of making payments from the Fund to the Estate.

Absence of Tax Avoidance and Unnecessary Delays

You state that there is no issue on the facts as stated of any tax or other benefit in the delays in realising the Fund's assets.

The delays have been caused by a variety of factors set out in this ruling request - many of which have been outside the control of The Trustee and its advisers.

The various delays and challenges in finalising the administration of the Fund have not been matters that could have easily been avoided by the Trustee or its advisers. It is clear on the facts that the Trustee and its advisers have been doing all things necessary to properly and appropriately manage the affairs of the Fund with a view to effecting the final payment to the Estate.

As sole director of the Trustee, the relative has no interest and no wish to delay payment of the benefits to the Estate. You contend that the relative has been doing everything possible to expedite the matter to the best of her ability.

In conclusion, given the definition of the term 'as soon as practicable', the delays incurred in bringing the Estate to an administrable position, and the facts evidencing the Accountants and sole director of the Trustee working towards finalising the administration of the Estate, the final payment may be considered as having been made 'as soon as practicable'.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).