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Edited version of your written advice
Authorisation Number: 1013126979667
Date of advice: 18 November 2016
Ruling
Subject: Death benefit- taxation
Question
Is the Trustee of the Deceased Estate required to pay tax on the death benefits payments to be made to a charitable trust and to an individual, non-dependent beneficiary?
Answer
Yes
This ruling applies for the following period:
Income year ended 30 June 20ZZ.
The scheme commences on:
1 July 20YY.
Relevant facts and circumstances
The Deceased passed away in the 20XX-YY income year and in the same year the Executors of the Will obtained a grant of probate of the Estate.
The Deceased was a member of a Superannuation Fund (the Fund).
In accordance with the Deceased's will, the Fund's balance is to go the Beneficiary and to a charitable trust, which was set up upon the Deceased's death.
The Fund's balance has been paid as death benefits payments to the trustee of the Estate.
The Trust is an education trust and is registered with the Australian Charities and Not for Profit Commission.
The Beneficiary is a non-dependent beneficiary of the Deceased.
Relevant legislative provisions
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 302-195.
Reasons for decision
Subsection 302-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that:
To the extent that 1 or more beneficiaries of the estate who were death benefits dependents of the deceased have benefited, or may be expected to benefit, from the * superannuation death benefit:
(a) the benefits is treated as if it had been paid to you as a person who was a death benefits dependent of the deceased; and
(b) the benefit is taken to be income to which no beneficiary is presently entitled.
*To find the definition of asterisked terms, see the Dictionary, starting at section 995-1.
Thus where a death benefits dependent receives or will receive all or part of a superannuation death benefit payment, the trustee will be subject to tax on that part of the benefit paid or to be paid to the dependent as if it had been paid to that beneficiary. However, the dependent beneficiary is not presently entitled to the payment and the benefit does not form a part of their 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 dependent s 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 dependent of the deceased; and
(b) the benefit is taken to be income to which no beneficiary is presently entitled.
*To find the definition of asterisked terms, see the Dictionary, starting at section 995-1.
Where a non- dependent beneficiary receives or will receive all or part of a superannuation death benefit payment, the trustee will be subject to tax on that part of the benefit paid or to be paid to the dependent as if it had been paid to that beneficiary. However, the dependent beneficiary is not presently entitled to the payment and the benefit does not form a part of their assessable income.
The facts show that the Beneficiary is a non-dependent beneficiary of the Deceased. Thus, the death benefit payment for the Beneficiary must be treated by the trustee of the Estate as if it had been received by the Beneficiary.
To determine how the death benefit payment for the Trust should be treated, it must be established whether the Trust is a dependent or non-dependent beneficiary of the Deceased.
Meaning of death benefits dependent
Section 302-195 of the ITAA 1997 defines a death benefits dependent as:
(a) the deceased persons *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 section 302-200 just before he or she died; or
(d) any other person who was a dependent of the deceased just before he or she died.
*To find the definition of asterisked terms, see the Dictionary, starting at section 995-1.
The Trust does not and cannot fall within any of the categories listed and must therefore be considered a non-dependent beneficiary.
Tax treatment of a death benefits payment made to a non-dependent beneficiary
Section 302-140 of the ITAA 1997 provides that the tax free component of a superannuation death benefit payment received by a non-dependent is not assessable income and is not exempt income.
In relation to the taxable component of a death benefit payment, section 302-145 of the ITAA states the following:
(1) If you receive a superannuation lump sum because of the death of a person of whom you are not a *death benefits dependent, the *taxable component of the lump sum is assessable income.
Note: For taxable component, see Subdivision 307-C
(2) You are entitled to a *tax offset that ensure that the rate of the income tax on the *element taxed in the fund of the lump sum does not exceed 15%
(3) You are entitled to a *tax offset that ensure that the rate of the income tax on the *element taxed in the fund of the lump sum does not exceed 30%
*To find the definition of asterisked terms, see the Dictionary, starting at section 995-1.
Consequently, the taxable component of the lump sum payments made by the Fund will be taxed as per the above rates. The taxable components of the payments must be disclosed in the income tax return of the Estate.
Once the payment is made from the Estate to the relevant beneficiary, it will not need to be included as assessable income in that beneficiary's tax return as the payment represents a distribution of the Estate.
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