Edited version of your written advice

Authorisation Number: 1051519629834

Date of advice: 22 May 2019

Ruling

Subject: Death benefit to dependant

Questions

1. Is the passing of benefits to the legal personal representative of the Deceased a lump sum to which section 302-10 and 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997) apply?

2. On the distribution of the Property from the trustee of the SMSF to the legal personal representative of the Deceased, does the legal personal representative attain the market value cost base under the market value substitution rules in section 112-20 of the ITAA 1997 or a cost base that is equal to the value of the Deceased’s interest in the SMSF based on it being the consideration for the passing of that land?

3. Does the passing of the Property as a lump sum from the SMSF to the deceased estate and then to the Family Trust affect the tax-free nature of the benefit?

4. Are distributions and payments out of the Will Trust to either the Deceased’s Spouse or Child exempt from tax as payments to a death benefit dependant for the purposes of section 302-195 of the ITAA 1997?

5. Will the benefits paid from the SMSF to the Deceased Estate be considered to have been paid as soon as practicable if paid within a year of the ruling request?

6. Is any gain on the disposal of the Property by the Deceased as the trustee of the SMSF to either themselves as legal personal representative or to a third party subject to tax?

Answer

1. Yes

2. No

3. No

4. Yes

5. Yes

6. No

This ruling applies for the following periods:

Income year ending 30 June 2019

Income year ending 30 June 2020

The scheme commences on:

1 July 2018

Relevant facts and circumstances

The Deceased died in the 2012-13 income year.

The Deceased had a spouse (the Spouse).

The Deceased was the sole member of a Self-Managed Superannuation Fund (the SMSF).

The SMSF was established more than 10 years ago.

An entity (the Company) was the trustee of the Fund.

The Deceased was a director and shareholder of the Company until 2010 when another person became the sole shareholder and director (the Director).

The whole of the SMSF was allocated to paying the Deceased’s pension.

In the 2012-13 income year, the Deceased completed a Binding Death Benefit Nomination form (BDBN) nominating a beneficiary.

The principal asset of the SMSF is an industrial property (the Property).

An entity (Company 2) is a company controlled by the Director which had an under market value tenancy of part of the premises owned by the Fund. The remaining part of the industrial property is occupied by a third party under a lease granted by the SMSF.

The Deceased’s Will (the Will) named a person (the Trustee) as the executor of their estate.

Under the Will, the proceeds from the SMSF are to be held for the benefits of the Spouse and their adopted child, (the Child) and trusts in which the Deceased’s spouse has an interest.

In the 2013-14 income year, Probate was granted and was resealed.

After the death of the Deceased, the Trustee directed the tenants of the Property to pay their rent directly to the Trustee rather than to the Company.

In the 2015-16 income year, the Trustee brought an action in the Relevant Court for declarations that the Company held the Property, and the accrued revenue from the property, on trust for the Deceased’s estate and that the Company was bound by the BDBN.

The Court found that BDBN was effective and that the Trustee was the legal personal representative.

An appeal by the Company was dismissed by the Full Relevant Court.

Under the terms of the BDBN, the residue of the SMSF was directed to be paid to the Trustee.

The Property has been transferred into the Trustee’s name.

Prior to the Deceased’s death, the Deceased and the Spouse had purchased a home overseas. They had undergone fertility treatment before deciding to adopt a child from overseas.

The Deceased died before the adoption process could be finalised.

The adoption process was undertaken through lawyers overseas.

In the 2011-12 income year, custody was granted to the Deceased and the Spouse. The Child lived primarily with the Deceased and the Spouse.

After the Deceased was diagnosed with a terminal illness, they underwent treatment in Australia. During this time, the Deceased remitted funds back to the Spouse overseas to pay adoption costs as well as for daily expenses and household bills.

Bank receipts have been provided evidencing the payments to the Spouse.

No part of the Fund has been paid out due to protracted legal proceedings, which remain ongoing.

The winding up of the SMSF will be effected by the Property or its proceeds of sale being transferred from the Trustee of the Fund to the Trustee as the legal personal representative of the Deceased to be held on the trusts of the Will of the Deceased. Those trusts provide for the superannuation benefits received by the deceased estate to be transferred from the Trustee to the Spouse, to be held by them as trustee of a trust (the Trust).

The current intention is to wind up the SMSF and possibly sell the Property.

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 101A(3)

Income Tax Assessment Act 1997, Subdivision 295-F

Income Tax Assessment Act 1997, section 302-60

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 302-195(1)

Income Tax Assessment Act 1997, subparagraph 302-195(1)(a)

Income Tax Assessment Act 1997, subparagraph 302-195(1)(d)

Income Tax Assessment Regulations 1997, subregulation 995-1.01(1)

Income Tax Assessment Regulations 1997, subregulation 995-1.01(2)

Income Tax Assessment Regulations 1997, subregulation 995-1.01(3)

Superannuation Industry (Supervision) Regulations 1994, subregulation 6.21(1)

Reasons for decision

Question 1

Summary

The Spouse is a death benefit dependant of the Deceased because they were the Deceased’s spouse pursuant to subparagraph 302-195(1)(a) of the ITAA 1997.

The Child is a death benefit dependant of the Deceased because they were a dependant of the Deceased just before the Deceased died pursuant to subparagraph 302-195(1)(d) of the ITAA 1997.

Therefore, in accordance with section 302-60 of the ITAA 1997, any benefit received by either the Spouse or the Child from the SMSF is not assessable income and is not exempt income. That is, the benefit is tax free.

Detailed reasoning

Section 302-60 of the ITAA 1997 states:

A superannuation lump sum that 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.

Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant of a person who has died as:

(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 just before he or she died.

As the Spouse is the spouse of the Deceased, they are considered to be a death benefit dependant of the Deceased pursuant to subparagraph 302-195(1)(a) of the ITAA 1997.

As the Child is a child, aged under 18, whom the Deceased intended to adopt, but had not formally adopted at the time of their death, paragraphs 302-195(1)(a),(b) and(c) do not apply. Therefore, to conclude that the Beneficiary is a death benefits dependant of the Deceased, it must be established that the Child was a ‘dependant’ of the Deceased just before the Deceased died.

Meaning of ‘dependant’

According to the Macquarie Dictionary, a ‘dependant’ is:

1.one who depends on or looks to another for support, favour, etc 2. a person to whom one contributes all or a major amount of necessary financial support.

Butterworth’s Australian Legal Dictionary defines ‘dependant’ as ‘a person who depends on another, wholly or substantially’.

In the Victorian Supreme Court case of Fenton v. Batten [1949] ALR 69; [1948] VLR 422, Justice Fullager made the following comments regarding dependency:

The word dependant is, in a true sense a technical term. If the evidence established that the alleged dependant relied on or relies on another as the source wholly or in part of his or her existence then dependence is established. Questions of scale of living do not enter into the matter in the absence of some such statutory enactment.

In Case [2000] AATA 8, (2000) 43 ATR 1273; 2000 ATC 129, Senior Member Fayle in considering the definition of dependant in relation to section 27AAA of the Income Tax Assessment Act 1936 (ITAA 1936) stated:

The Act is primarily concerned with commercial and financial matters. An Act relating to the imposition assessment and collection of tax upon incomes. As such, a question of dependency should be construed within that context. The relevant question in this sense is whether the applicants were financially dependent on their son at the relevant time.

Handing down the decision in Re Malek v. Federal Commissioner of Taxation Case [1999] AATA 678; (1999) 42 ATR 1203, (1999) 99 ATC 2294, Senior Member Pascoe of the Administrative Appeals Tribunal (AAT) further clarified the meaning of the word dependant, stating:

In my view, the question is not to be decided by counting up the dollars required to be spent on the necessities of life for [Mrs Malek], then calculating the proportion of those dollars provided by the [son] and regarding her as a dependant only if that proportion exceeds 50%...In my view, the relevant financial support is that required to maintain the person’s normal standard of living and the question of fact to be answered is whether the alleged dependant was reliant on the regular continuous contribution of the other person to maintain that standard.

In the current case, it is clear that the Deceased provided regular continuous financial support to the Child. However, what must be shown is that the Child depended or relied on that support to maintain their normal standard of living at the time of the Deceased’s death.

Assessing the circumstances holistically, we consider that the Child did rely on the financial support provided by the Deceased to maintain their normal standard of living at the time of the Deceased’s death. Our view is based on the following:

(a) the Child lived with the Deceased and the Spouse pending finalisation of the adoption process.

(b) the Deceased provided funds for the upkeep and maintenance of the household and of the Child as the Spouse did not work.

Consequently, the Child is a death benefits dependant of the Deceased as defined in section 302-195 of the ITAA 1997.

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 the 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.

Under the terms of the BDBN, the residue of the SMSF was directed to be paid to the legal personal representative as the Trustee of the Deceased Estate, therefore section 302-10 of the ITAA 1997 will apply.

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 to receive all or part of a superannuation death 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 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 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 to receive part or all of a superannuation death 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 their assessable income.

Application of subsection 101A(3) of the ITAA 1936

Subsection 101A(3) of the ITAA 1936 states:

To avoid doubt, if in the year of income an amount is included in the assessable income of a deceased taxpayer under Division 82 or 302 of the Income Tax Assessment Act 1997 in respect of a payment received by the trustee of the estate of a deceased taxpayer, that amount shall be included in the assessable income of the trust estate.

Subsection 101A of the ITAA 1936 brings into the assessable income of the trust estate the amount of a superannuation death benefit received after the death of a taxpayer that is included in the assessable income of a deceased taxpayer under Division 302 of the ITAA 1997.

As the Spouse and the Child are death benefits dependants of the Deceased, any benefits received from the SMSF are not assessable and are not exempt income in accordance with section 302-60 of the ITAA 1997. That is, those benefits are tax free.

Question 2

Detailed reasoning

As discussed below at Question 3, as the Property was an asset used to support the Deceased’s superannuation income stream there will be no capital gains tax payable on the disposal of the property.

Question 3

Summary

As the Spouse will receive a lump sum payment that supported the Deceased’s superannuation income stream prior to their death, there are no tax consequences or capital gains tax payable from the eventual disposal of the property.

Detailed reasoning

Exempt current pension income

Income that a complying superannuation fund derives from assets set aside or used to pay superannuation income stream benefits to members, which would otherwise be assessable income, is deemed to be exempt income where the conditions in subdivision 295-F of the ITAA 1997 are satisfied for an income year. Such income is commonly referred to as exempt current pension income (ECPI).

The ITAA 1997 defines ‘superannuation income stream benefit’ in subsection 307-70(1) as:

A superannuation benefit specified in the regulations that is paid from a superannuation income stream.

Further, the ITAA 1997 also defines ‘superannuation income stream’ with reference to the Income Tax Assessment Regulations 1997 (ITAR 1997). Subregulation 995-1.01(1) of the ITAR 1997 states:

superannuation income stream means:

…

(d) for the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act one or more rights (whether contingent or not), to the extent that they are covered by subregulation (3). (emphasis added)

The definition of ‘superannuation income stream benefit’ is provided at subregulations (2) to (5) of the ITAR 1997 of which the relevant subregulations in this case are:

Subregulation 995-1.01(2) which states:

Subregulation (3) applies if:

(a) immediately before the death of a person (the deceased), a superannuation interest was supporting a superannuation income stream payable to the deceased; and

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

(c) one or more other persons each have a right (whether contingent or not) to be paid an amount that will be a superannuation benefit from the superannuation interest; and

(d) each such right arises on the death of the deceased and ceases to exist immediately after the payment of the amount mentioned in paragraph (c).

Subregulation 995-1.01(3) which states:

For the purposes of paragraph (d) of the definition of superannuation income stream in subregulation (1), this subregulation covers each such right, to the extent that the value of the superannuation interest has not increased (other than through investment earnings) on or after the deceased’s death.

The above means that where all conditions are satisfied, a superannuation fund will continue to be entitled to the earnings tax exemption for a specified period after the death of a member in relation to earnings on an amount that is subsequently paid as a superannuation death benefit lump sum.

In this case, the sole member of the Fund passed away in the 2012-13 income year. Immediately prior to death the Deceased was in receipt of pension income from the SMSF and on the death of the Deceased, the pension did not automatically revert to another person.

The facts show that there are beneficiaries to whom the superannuation benefits will be paid under the Will and that payment has been delayed due to complications which included protracted court proceedings.

In view of the above it is considered the relevant requirements in subregulations 995-1.01(1), 995-1.01(2) and 995-1.01(3) of the ITAR 1997 have been satisfied. Therefore, the Fund payments made by the SMSF following the Deceased’s death will be taken to be superannuation income stream benefits for the purposes of claiming ECPI under subdivision 295-F of the ITAA 1997.

Question 4

As both the Spouse and the Child are considered to be death benefits dependants of the Deceased, the benefits that they will receive fall within the scope of subsection 302-10(2) of the ITAA 1997.

Therefore, pursuant to section 302-60 of the ITAA 1997 any benefits received are not assessable income and are not exempt income.

Question 5

Summary

As the relevant requirements in subregulations 995-1.01(1), 995-1.01(2) and 995-1.01(3) of the ITAR 1997 are satisfied, the SMSF will be able to claim the tax exemption under subdivision 295-F of the ITAA 1997 on the retirement phase earnings from the member’s date of death until the date of payment of the death benefit.

Detailed reasoning

Notwithstanding the requirements in subregulations 995-1.01(1), 995-1.01(2) and 995-1.01(3) of the ITAR 1997 have been met it should be noted that under subregulation 6.21(1) of Superannuation Industry (Supervision) Regulations 1994 an SMSF member's benefits must be cashed ‘as soon as practicable' after the death of the member.

Where the trustee pays the benefits to a dependant of the deceased, they may be cashed out as a lump sum or as one or more pensions. For non-dependant beneficiaries the death benefit must be paid as a lump sum.

The Commissioner’s view is that a death benefit lump sum must actually be paid to the beneficiary by transfer of ownership of the deceased member's assets to the beneficiary. Cashing involves an SMSF making a payment which reduces the member's benefits in the fund.

There is no legislative definition of the term 'as soon as practicable'. The Commissioner expects that a trustee will make all reasonable efforts to cash the death benefits in a prompt manner. If there are reasonable delays that can be verified then the ATO may accept the actions of the trustee. The Commissioner will take into consideration any legal issues that prevent the liquidation of fund assets for the payment of the death benefits to the beneficiary.

Generally, where benefits are paid on the grant of probate, which has been delayed due to court action, this would be considered 'as soon as practicable'.

The trustee does not have the option of holding the assets in the fund indefinitely for the purpose of maximising a profit on sale or for the convenience of the relevant entities.

Where death benefits are not paid to the beneficiary 'as soon as practicable' this will result in a contravention of the payment standards.

The facts show that there have been reasonable delays in the payment of death benefits. Provided the death payments are made soon after the conclusion of court proceedings it would be accepted that the in this case the death benefits will be accepted as being made as soon as practicable if paid by the end of the next financial year.

Question 6

As discussed at question 3 above, the Property was an asset used to support the Deceased’s superannuation income stream there will be no capital gains tax payable on the disposal of the property.

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