Edited version of your written advice

Authorisation Number: 1051240397687

Date of advice: 21 June 2017

Ruling

Subject: Superannuation death benefits

Questions

1. Will the payments, or any part of the payments (the interim or final part) from the Fund to the Applicants as legal personal representatives of the Deceased’s estate (the Estate) and then to each of the adult children be treated as a 'superannuation death benefit’ for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997)?

2. Will the payments or any part of the payments (the interim part or final part) from the Fund to the Applicants as legal personal representatives of the Estate and then to each of the adult children be treated as a 'superannuation member benefit’ for the purposes of the ITAA 1997?

3. Will the payment to the Estate be taxed in accordance with ITAA 1997?

4. Will the payment made subsequently to the adult children from the Estate be taxed in accordance with ITAA 1997?

5. If some or all of the payments will be treated as 'superannuation member benefits 'will the children be able to access their low rate cap for the proportion of the payment they received?

6. Does the Estate have the obligation to withhold the tax payable on the payments for the purposes of the ITAA 1997?

7. Will the earnings of the Fund cease to be exempt current pension income (ECPI) for the purposes of ITAA 1997?

8. Did the Fund breach the Superannuation Industry (Supervision) Act 1993 as a result of the delay in making the payment of the death benefits?

Answers

1. Yes

2. No

3. Yes

4. No

5. Decline to rule

6. Yes

7. No

8. Decline to rule

This ruling applies for the following period:

Income year ending 30 June 20DD

The scheme commences on:

1 July 20CC

Relevant facts and circumstances

The Applicants are the children of the Deceased.

The Deceased was aged 65 and died in 20BC.

At the time of their death the Deceased was a member of the Fund, a complying self- managed superannuation fund.

The Fund was established in 19XX. The original trustees were the Deceased and the Spouse of the Deceased (the Member) were the only members of the Fund.

The trust deed of the Fund was subsequently amended at various times from 20AA to 20CC . In 20BB the Deceased and the Member retired as trustees of the Fund and a company (the Trustee) was appointed as the corporate trustee of the Fund. The Deceased and the Member were directors of the Trustee.

At the time of the Deceased’s death the Deceased was the only director of the Trustee and sole member of the Fund as the Member had predeceased the Deceased.

Prior to the Deceased death the Deceased had some pension and an accumulation interests in the Fund:

At the date of the Deceased death, the assets of the Fund included a property (the Property) leased to a related party and used wholly and exclusively in carrying on a business.

The administration of the Deceased’s estate (the Estate) and dealing with their death in the Fund took significantly longer than anticipated.

The reason for the delay included the following:

a. There were a number of issues with the drafting of the Deceased will, which led to the almost two monthly delay in obtaining probate

b. A number of different solicitors have been engaged:

i. As the Applicants had initially engaged the solicitor who drafted the Deceased will to advise them as Executors upon becoming aware of the drafting errors they determined it was in the best interest of the Deceased estate to seek advice from a different solicitor.

ii. The second solicitor engaged by the Applicants had to be excused from acting for the Estate shortly after their engagement due a conflict of interest. This forced the Applicants to engage their third and current solicitor.

iii. Transferring the file between each of the solicitors took some time. Also due to the complexity of the estate there were delays in progressing the administration of the estate as each solicitor needed to review the current status of the administration before being able to advise on how to progress the administration

c. As one of the beneficiaries under the Deceased will, Applicant 3 was an undischarged bankrupt the Applicants sought professional advice on their obligation in relation to this beneficiary to ensure that they were acting in all of the beneficiary’s best interest.

d. Finalising the assets of the Fund:

i. All the assets of the Fund except the Property were sold and the proceeds received in the Funds bank account by the end of 20BC.

ii. At the time of the Deceased’s death the Property was leased to a related party. However the current lease had expired (and was occupied under a periodic lease) and although there were indications that another lease had been prepared, no signed lease documentation could be located by the Applicants.

iii. On the Deceased death one of the beneficiaries Applicant 1 continued to run the business owned by the related party tenant.

iv. The Applicants had obtained professional advice that the potential sale price for the Property would be significantly impacted if it was sold without a lease in place.

v. Given the proportion of the superannuation interest that the Property represented the Applicants determined that it was in the best interests to negotiate with Applicant 1 (who was the controller of the related party tenant) to sign a new lease.

vi. Despite their efforts to negotiate Applicant 1 refused to sign a new lease for the Property. As a result the parties proceeded to sell the Property without a lease in place and Beneficiary 1 chose to give up vacant possession on the settlement of the Property.

vii. This process required extensive discussion with Applicant 1 and all the beneficiaries of the Property as to the best way to proceed, which took a significant period of time.

The Trustee passed a resolution in early 20CC which recorded the reasons for the delays in administering the Estate and paying the death benefit from the Fund

Following the Deceased death Applicant 2 was appointed as the sole director of the Trustee.

The Trustee paid the Deceased death benefit as follows:

a. An interim payment to the Applicants as legal personal representatives of the Deceased in late 20BC and

b. A Final payment to the Applicants as the legal personal representatives of the Deceased estate in mid 20CC (made up of an amount in cash and a further amount by way of an in specie transfer of the Property)

c. An anti-detriment payment was also paid together with the interim and final payments outlined above.

The Trustee retained an amount of the final payment in the Fund as it believed it was required to withhold tax. Upon further advice it was not required to withhold the Trustee paid the remaining amount in the Fund to the trust account of the solicitor acting on behalf of the Estate in mid 20CC as it had resolved to do so on in mid 20CC.

In accordance with the Deceased’s will it is intended that the superannuation received by the Applicants as the legal personal representatives of the Deceased will be paid to the X children:

a. Applicant 1

b. Applicant 2

c. Applicant 3

d. Applicant 4

All the children are over 25 years of age and are not death benefits dependants for the purposes of ITAA 1997.

Due to the delays in paying the Deceased death benefit from the Fund the Applicants and Trustee are not clear whether the Payment of the Deceased’s death benefit to the Applicants as legal personal representatives of the Deceased and subsequent payment to the children as the ultimate beneficiaries is to be a 'superannuation death benefit 'or a member benefit for the purposes of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Paragraph 27A(1)(d)

Income Tax Assessment Act 1997 Section 295-385

Income Tax Assessment Act 1997 Section 295-390

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 Subsection 302-10(1)

Income Tax Assessment Act 1997 Section 302-145

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

Income Tax Assessment Act 1997 Subsection 307-5(3)

Income Tax Assessment Act 1997 Section 307-65.

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

Income Tax Assessment Regulations 1997 sub regulation 995-1.01(3)

Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06

Reasons for decision

Summary

The payments (the interim and final part) from the Fund to the Applicants as legal personal representatives of the Estate and then to each of the adult children will be treated as 'superannuation death benefit’ for the purposes of the ITAA 1997

The payments from the Fund to the Applicants as legal personal representatives of the Estate and then to each of the adult children will not be treated as a 'superannuation member benefit’ for the purposes of the ITAA 1997 as the pension are considered to have ceased upon the Deceased death and this does not meet the definition of commutation.

With respect to the lump sum payments made to the Estate, section 302-140 of the ITAA 1997 provides that the tax free component of a superannuation death benefit payment received by a non-dependant 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 would apply and the taxable component of the lump sum payments made by the Fund will be taxed accordingly. 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 Applicants it will not need to be included as assessable income in that Applicant’s tax return as the payment represents a distribution of the Estate.

It is accepted that the circumstances presented as set out in the relevant facts for this case support your contention that the payment of the lump sums were made as soon as practicable and the ECPI exemption will be allowed in this case.

Detailed reasoning

Superannuation lump sum

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.

The table contained in subsection 307-5 (1) of the ITAA 1997 identifies the different types of superannuation benefits. One such payment is a superannuation death benefit. A superannuation death benefit is described in Column 3 of the table in subsection 307-5(1) as including:

A payment to you from a superannuation fund, after another person’s death, because the other person was a fund member.

Prior to their death, the Deceased was a member of the Fund which you have stated is a complying superannuation fund. As a result of their death, superannuation death benefits were paid by the Trustee in late 20BC and mid 20CC, (the balance of the latter payment being made in mid 20CC) respectively, in respect of the Deceased.

The superannuation lump sum benefits were paid to the Applicants as legal personal representatives of the Estate. The beneficiaries of the Estate are the Deceased’s children aged over 25.

The lump sum benefits were paid to the Applicants by the Fund after the Deceased’s death, because the Deceased was a member of the Fund. Therefore, the lump sum benefits are superannuation death benefits within the meaning of subsection 307-5 (1) of the ITAA 1997.

Superannuation member benefit

The table contained in subsection 307-5 (1) of the ITAA 1997 describes a superannuation member benefit as including:

A payment to you from a superannuation fund because you are a fund member.

In this case, the payments to the Applicants are not superannuation member benefits as it is not a payment from the Fund because the Applicants were members of the Fund.

Prior to 1 July 2016, in accordance with subsection 307-5(3) a superannuation benefit is also a superannuation member benefit if:

(a) the superannuation benefit arises from the commutation of a *superannuation income stream; and

(b) it would be a *superannuation death benefit apart from this subsection; and

(c) the benefit is paid after the latest of the following:

(i) 6 months after the death of the deceased person;

(ii) 3 months after the grant of probate of that deceased person's will or letters of administration of that deceased person's estate;

(iii) if the payment of the benefit is delayed because of legal action about entitlement to the benefit - 6 months after the legal action ceases;

(iv) if the payment of the benefit is delayed because of reasonable delays in the process of identifying and making initial contact with potential recipients of the benefit - 6 months after that process is completed; and

(d) the Commissioner has not made a decision about the benefit under subsection (3A).

In order to meet the first requirement under subsection 307-5(3) of the ITAA 1997 to be a superannuation member benefit the benefit must arise as a result of a commutation of a superannuation income stream.

Taxation Ruling 2013/5 Income tax: when a superannuation income stream commences and ceases (TR 2013/5) provides the following at paragraph 14:

A superannuation income stream ceases when there is no longer a member who is entitled, or a dependant beneficiary of a member who is automatically entitled, to be paid a superannuation income stream benefit from a superannuation interest that supports a superannuation income stream

TR 2013/5 further provides at paragraph 29:

A superannuation income stream ceases as soon as a member in receipt of the superannuation income stream dies, unless a dependant beneficiary of the deceased member is automatically entitled, under the governing rules of the superannuation fund or the rules of the superannuation income stream, to receive an income stream on the death of the member. If a dependant beneficiary of the deceased member is automatically entitled to receive the income stream upon the member's death, the superannuation income stream continues.

The meaning of commutation

As noted in TR 2013/5 'Commutation' is an integral concept of the tax and superannuation regulatory regimes that affects the payment of benefits from a superannuation interest that supports a superannuation income stream. As 'commutation' is not defined in either the ITAA 1997, the Income Tax Assessment Regulations 1997 (ITAR 1997) or the Superannuation Industry (Supervision) Regulations (SISR) it takes its ordinary meaning in the context in which it appears.

The Macquarie Dictionary gives the meaning of 'commute' as 'to change (one kind of payment) into or for another, as by substitution'.

The concept of commuting a pension entitlement was considered by Deputy President Forgie in Re Hammerton and Comcare Australia [48] (Re Hammerton). This case considered the character of a payment received on the partial commutation of a pension. That is, whether it retained its character as a pension payment, or became a lump sum payment. It was held by Deputy President Forgie (at paragraphs 47 and 48) that:

It is implicit in this case that the commutation has had the effect of changing the essential nature of periodical pension payments into something else. That seems to me to accord with what happens when a single payment takes the place of an on-going periodic payment of pension. It also accords with the normal meaning of 'commute' i.e. 'to exchange for another or something else ... interchange 2. to change (one kind of payment) into or for another as by substitution ... to make a collective payment, esp. of a reduced amount, as an equivalent for a number of payments...' (Macquarie Dictionary).

It follows that Mr Hammerton has received a lump sum benefit under a superannuation scheme as well as being in receipt of ongoing pension payments.

The concept of commuting a pension entitlement was also considered by Member Allen in Cooper and Commissioner of Taxation [49] (Cooper). This case considered whether a lump sum payment of arrears of an invalidity pension, payable under the Defence Force Retirement and Death Benefits Act 1973, constituted a commutation of the pension. The question of whether the payment was a commutation of a superannuation pension was relevant in determining whether that lump sum payment was an 'eligible termination payment' for the purposes of former paragraph 27A(1)(d) of the Income Tax Assessment Act 1936 (ITAA 1936). It was held by Member Allen (at paragraph 26) that the relevant payment was not in substitution or exchange for any right Mr Cooper had:

I agree with those submissions and would add that any commutation must be in accordance with the provisions of the superannuation scheme in question. In my opinion a commutation of a superannuation pension requires a beneficiary to make a conscious decision to exchange future entitlements, or a mixture of past and future entitlements, for some other form of benefit (usually a lump sum) as permitted by the scheme. Mr Cooper made no such decision. Once the Authority had determined that he would be treated as having been retired on invalidity or incapacity grounds he became entitled to receive his arrears from the date of retirement and a future pension. The arrears could only be calculated and paid as a lump sum in the way that it was by the Authority. I have no reason to doubt Mr Barton's evidence of the calculations that he made or the appropriateness of his assumptions. I do not, however, believe that his evidence established that there was a commutation of a pension. ....On the evidence I consider that Mr Cooper received his full entitlement as to arrears and that receipt of arrears did not alter in any way the right to receive the pension in future in the same amount and on the same terms. There was no exchange or substitution of anything. There was no commutation of future pension entitlements and the payment of the arrears by a lump sum was not a commutation of past pension entitlements.

In each case consideration was given to whether there had been an exchange of entitlements to one thing (periodical payments) for another (a lump sum). Further, in Cooper Member Allen considered it necessary for the beneficiary to have made a conscious decision to exchange future entitlements for another form of benefit.

Although Re Hammerton concerned a pension comprised of periodical payments in the context of the Safety Rehabilitation and Compensation Act 1988, and Cooper considered a benefit that was accepted as satisfying the requirements for a pension under an earlier version of regulation 1.06 of the SISR, they provide guidance in the current context as for a superannuation income stream to exist there must be a series of periodic payments and these in turn can be exchanged for a lump sum payment.

Consistent with the ordinary meaning of commutation and the approach in these cases, a member or a dependant beneficiary commutes their superannuation income stream if they consciously and validly exercise their right to exchange some or all of their entitlement to receive future superannuation income stream benefits for an entitlement to be paid a lump sum. For the trustee of the fund, the liability to pay that member or dependant beneficiary periodic superannuation income stream benefits is substituted with a liability to pay a lump sum.

Given that the definition of commutation contemplates that the beneficiary will make a conscious decision to exchange future entitlements, or a mixture of past and future entitlements, for some other form of benefit (usually a lump sum) as permitted by the scheme, the ceasing of a pension upon the death of a pension member does not come under the definition of what is a commutation.

In this case the Deceased’s pension has ceased rather than arisen from a commutation. Therefore, the payment is not a superannuation member benefit.

Superannuation 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) 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 superannuation lump sum death benefits from the Fund were made to the trustee of the Estate section 302-10 of the ITAA 1997 will apply.

In accordance with subsection 302-10(2) of the ITAA 1997, the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the deceased estate.

This means that, where a dependant of the deceased receives or will receive part or all of a superannuation death benefit, the lump sum will be subject to tax as if it were paid to a dependant of the deceased, and the death benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10 (2) of the ITAA 1997).

Similarly, where a person who is not a dependant receives or will receive part or all of a superannuation death benefit, the benefit will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10 (3) of the ITAA 1997).

Superannuation death benefits will be treated concessionally if dependants of the deceased will benefit from the estate. Where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, the benefit is not assessable income and is not exempt income, that is, it is tax-free.

Death Benefits Dependant in relation to the superannuation death benefits

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 the meaning of death benefits dependant and states:

(1) 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.

You have stated in the facts presented that all the children are over 25 years of age and are not death benefits dependants for the purposes of ITAA 1997

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 1997 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.

(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%

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.

Exempt current pension income

Sections 295-385 and 295-390 of the ITAA 1997 provide an income tax exemption for the income of a complying superannuation fund that is supporting current liabilities of superannuation income stream benefits payable by the fund at the particular time.

The term superannuation income stream benefit is defined by the ITAA 1997 with reference with regulation 995-1.01 of the ITAR 1997. Subregulation 995-1.01(3) of the ITAR 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’s 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.

It is accepted that the circumstances presented as set out in the relevant facts for this case support your contention that the payment of the lump sums were made as soon as practicable and the ECPI exemption will be allowed in this case

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