Edited version of your written advice

Authorisation Number: 1051311545379

Date of advice: 22 November 2017

Ruling

Subject: Death benefits

Questions

Are the superannuation death benefits payable to the trustee of the estate of the Deceased and then a beneficiary (the Beneficiary) absolutely, in accordance with the Deceased’s will, excluded as not being assessable income of the estate under sections 302-10 and 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answers

Yes

This ruling applies for the following period

Income year ended 30 June 2018

The scheme commenced on

1 July 2017

Relevant facts and circumstances

The Deceased passed away in the 2015-16 income year.

The Deceased is survived by:

● the Beneficiary who is the Deceased’s spouse; and

● the children.

Superannuation funds have paid superannuation death benefits to the Deceased’s estate which is currently being held in a bank account in the Beneficiary’s name as the executor of the Estate.

The Deceased made a will (the Will) which contains provision where the Beneficiary survives the Deceased.

The Beneficiary has been appointed as the executor of the Will.

Under a clause of the Will (Clause X), a testamentary discretionary trust is created with the Beneficiary as the primary beneficiary. The terms of the testamentary discretionary trust are set out in the Will. Relevantly, the Will defines the beneficiaries of the testamentary discretionary trust to include the primary beneficiary, the children of the primary beneficiary, a range of other relatives of the primary beneficiary as well as trusts, companies and other entities in which any of the beneficiaries has an interest, and charitable or religious entities.

Under another clause of the Will (Clause Y), the executor must transfer the estate to the trustee of the testamentary discretionary trust unless the Beneficiary (in their personal capacity) instructs the executor in writing to transfer some or all of the estate to themselves absolutely, or to deal with it in some other way.

Due to the operation of section 302-10 of the ITAA 1997, it is not desirable for the superannuation death benefits to be dealt with under the trust created under Clause X of the Will because the class of beneficiaries is wider than the Deceased’s dependants (being the Beneficiary and the Deceased’s children) and as such, includes beneficiaries who would not be death benefit dependants for the purposes of Division 302 of the ITAA 1997.

As a result, it is proposed that the superannuation death benefits will be paid to the executor/trustee of the Deceased estate and to the Beneficiary (in their personal capacity) under Clause Y of the Will.

Outside the ambit of the Will, it is proposed that the Beneficiary will then settle a separate trust estate with the superannuation death benefits, of which they are trustee, and the beneficiaries of which will be the children. The trust estate will be settled within 3 years of the date of death of the Deceased.

Assumptions

The following assumptions have been made:

● the superannuation death benefits are paid from a complying superannuation fund for the purposes of subsection 302-5(a) of the ITAA 1997.

● the superannuation death benefits are paid as a superannuation lump sum for the purposes of section 307-65 of the ITAA 1997.

● The children are prescribed persons for the purposes of subsection 102AC(1) of the ITAA 1936 and are not excepted persons for the purposes of subsection 102C(2) of the ITAA 1936.

● The estate of the Deceased is worth more than $100,000.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6AA

Income Tax Assessment Act 1936 Subsection 102AC(1)

Income Tax Assessment Act 1936 Subsection 102C(2)

Income Tax Assessment Act 1936 Section 102AG

Income Tax Assessment Act 1997

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Subsection 302-5(a)

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 302-195

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

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

Reasons for decision

Question 1

In this case, the superannuation funds have paid death benefits to the Deceased’s estate. The death benefits from the superannuation funds are currently being held in a bank account in the Beneficiary’s name as the executor of the Estate. Provided that the superannuation funds are complying superannuation plans, the death benefits will be superannuation death benefits as defined in subsection 307-5(4) of the ITAA 1997 and the provisions of Division 302 of the ITAA 1997 will apply.

Subsection 302-10(1) of the ITAA 1997 provides that the section will apply to the trustee of a deceased estate if they receive a superannuation death benefit in their capacity as trustee. As the payments in this case will be superannuation death benefits to be received from a superannuation fund by the executor/trustee of the Deceased’s estate, section 302-10 of the ITAA 1997 will apply.

Under section 302-10 of the ITAA 1997, the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with whether the beneficiaries were or were not death benefit dependants of the Deceased. The effect of section 302-10 is to tax the death benefit to the same extent regardless of whether the benefit is paid to the beneficiaries directly or through the Deceased’s estate.

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 of a person who has died as including the deceased person’s spouse and the deceased person’s child, aged less than 18. As such, the Beneficiary and the children are death benefits dependants of the Deceased.

The tax treatment of the superannuation death benefits in the hands of the executor/trustee of the Deceased estate is determined by the operation of subsections 302-10(2) and (3) of the ITAA 1997. Effectively, where beneficiaries who are death benefit dependants of the Deceased are expected to receive part or all of a superannuation death benefit, that part of the death benefit will be subject to tax in the hands of the executor/trustee as if they were a dependant of the Deceased.

Subsection 302-10(2) of the ITAA 1997 provides as follows:

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.

It is important to note that subsection 302-10(2) of the ITAA 1997 refers to death benefit dependants who ‘have benefited, or may be expected to benefit, from the superannuation death benefit’. The use of the phrase ‘may be expected to benefit’ connotes something that is less than absolute certainty. The death benefit dependant in question does not have to have already benefited from the death benefit. It is enough that they can reasonably be expected to benefit. In this case, it is reasonable to say that the Beneficiary may be expected to benefit from the superannuation death benefits.

Subsection 302-10(3) of the ITAA 1997 applies where 1 or more beneficiaries of the estate who were not death benefit dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit. As the Beneficiary is a death benefits dependant, subsection 302-10(3) has no application to the facts of this case.

As noted the Facts of this Ruling, the superannuation death benefits will be paid from the superannuation funds to the estate of the Deceased and then to the Beneficiary absolutely. Under subsection 302-10(2) of the ITAA 1997, where a death benefits dependant of the Deceased (i.e. the Beneficiary) is to receive part or all of a superannuation death benefit, the executor/trustee of the Deceased’s estate will be subject to tax on that part of the benefit to be paid to the dependant as if it were paid to a dependant of the Deceased.

Section 302-60 of the ITAA 1997 provides that:

A superannuation lump sum 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.

As a result, by subsection 302-10(2) of the ITAA 1997, the superannuation lump sum death benefits paid by the superannuation funds to the executor/trustee of the Deceased’s estate will not be assessable income of the estate, nor will it form part of the Beneficiary’s assessable income (see paragraph 302-10(2)(b) of the ITAA 1997).

When the superannuation death benefits are paid from the Deceased’s estate to the Benficiary absolutely, it will not be included in the Beneficiary’s assessable income because it will represent a distribution of the corpus of the estate.

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