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Ruling

Subject: Superannuation death benefits paid to deceased estate

Question

Whether, pursuant to section 302-10 of the Income Tax Assessment Act 1997 (ITAA  1997) superannuation death benefits received by the administrator of an insolvent estate of a deceased person are assessable to the insolvent estate in the income year in which they are received if no distribution can be made to any beneficiaries because of the insolvency of the estate?

Answer

Yes, if beneficiaries of the estate who would be expected to benefit from the superannuation death benefits are not death benefits dependants of the deceased person. This is still the case even though no distribution can be made to any beneficiaries because of the insolvency of the estate.

This ruling applies for the following period

2008-09 income year

The scheme commenced on

On or after 1 July 2008

Relevant facts

The deceased person died in September 2007. Letters of Administration (with the will annexed) were granted to the deceased person's parent by the court in December 2008.

A document was accepted by the court as the deceased person's last wishes and was annexed, as a valid will of the deceased person, to the Letters of Administration. It was stated in the document that the deceased person's parent was to get the benefit of all of the deceased person's property, if anything is left.

It was also stated in the document that the deceased person's de-facto spouse (the de-facto) should get back a specified amount which the latter put into the deceased person's home loan account and cheque & savings accounts.

No mention was made in the document as to who should receive the deceased person's superannuation entitlements.

The de-facto lodged claims with a number of superannuation funds, in relation to the deceased person's superannuation entitlements, for superannuation death benefit payments to be made directly to them. Apart from the de-facto, no other person lodged any claim for death benefit payments with the superannuation funds.

The de-facto also applied for Letters of Administration of the deceased estate to be granted to them and, in the alternative, for a declaration that a real property owned by the deceased person was held by the deceased estate on trust (as to one half) for them. In addition, the de-facto sought an order that they received funds out of the deceased estate pursuant to the Family Provision Act of a state.

The deceased person's parents disputed the de-facto relationship and sought to have Letters of Administration granted to them instead. The claim was later resolved in December 2008. Under the court order:

1. The de-facto was to receive a specified sum from the deceased estate in satisfaction of the de-facto's rights arising from a payment the de-facto made against the deceased person's mortgage. The specified sum was to be paid to the de-facto within 7 days of sufficient amount of superannuation death benefits being paid into the deceased estate.

2. Pursuant to the Family Provision Act, the de-facto was to receive, out of the deceased estate for their maintenance and advancement in life, any net proceeds upon the sale of the deceased person's real property which was the subject of the mortgage mentioned earlier. The net proceeds were to be paid to the de-facto within 7 days of completion of the sale.

3. The legal costs incurred by the deceased person's parents be paid or retained out of the deceased estate on the indemnity basis. The agreed amount of the de-facto's legal costs would also be paid within 7 days of the de-facto vacating the deceased person's property.

4. The court noted the de-facto's undertaking that they would forthwith withdraw their claims they lodged with the superannuation funds against the superannuation benefit payable in respect of the deceased person's death and would do all things and sign all such documents as may be reasonably necessary to ensure that such benefits were paid to the administrator of the deceased estate as soon as possible.

5. Letters of Administration were to be granted to the deceased person's parents.

According to the applicant, the de-facto's withdrawal of their claims against the superannuation funds facilitated the payment of those benefits to the deceased estate, as the intention of the parties at that time was to receive those benefits into the deceased estate, pay the de-facto the amounts ordered to be paid by the court, pay all other liabilities, and then distribute any surplus.

Superannuation death benefits totalling a certain amount were received into the deceased estate in March and April 2009. None of these superannuation death benefits contain a tax-free component.

Subsequent to the receipt of the superannuation death benefits by the administrator of the deceased estate (the administrator), the real property was sold but its sale price was far less than what had been anticipated. A dispute then arose as to whether the superannuation death benefit payments received were available for payment to creditors and whether the de facto's entitlement pursuant to the court order had priority over the other creditors of the deceased estate.

The de-facto brought a second claim against the deceased estate, demanding payment of the whole of funds due to them pursuant to the court order. Their claim was resisted on the basis that the superannuation death benefit payments were available for payment to creditors and that the de-facto's claims ranked only equal with all other creditors. Under a deed of release executed in February 2010, the de-facto agreed to receive from the deceased estate a reduced amount in full satisfaction of their rights pursuant to the court order inclusive of costs and any other rights against the deceased estate.

Due to the facts that the net proceeds from the sale of the deceased person's real property were insufficient to repay the outstanding amount of the mortgage and that the deceased estate had met substantial funeral and legal expenses, the liabilities of the deceased estate exceed its assets, and the deceased estate is therefore administered as an insolvent estate.

The applicant further advised that as the deceased estate is insolvent, no part of the assets of the deceased estate will be received by the deceased person's parents as beneficiaries and that apart from the deceased person's parents, there are no other beneficiaries.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 10-5

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 Section 302-60.

Income Tax Assessment Act 1997 Section 302-145

Income Tax Assessment Act 1997 Subsection 302-195(1).

Income Tax Assessment Act 1997 Section 995-1(1).

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

Summary of decision

The superannuation death benefits received by the administrator of the deceased estate are assessable to the estate in accordance with Subdivision 302-C of the ITAA 1997 if beneficiaries of the estate who would be expected to benefit from the superannuation death benefits are not death benefits dependants of the deceased person. This is still the case even though no distribution can be made to any beneficiaries because of the insolvency of the estate.

Detailed reasoning

Superannuation death benefits paid to trustee of deceased estate

Section 302-10 of the ITAA 1997 states that:

302-10(1) 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.

302-10(2) 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.

302-10(3) To the extent that 1 or more beneficiaries of the estate who were not *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.

According to section 302-60 of the ITAA 1997:

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.

According to subsection 302-145(1) of the ITAA 1997:

If you receive a superannuation lump sum because of the death of a person of whom you are not a death benefits dependant, the taxable component of the lump sum is assessable income.

This means that where a death benefits dependant of a deceased person is expected to benefit from a superannuation death benefit in relation to the deceased person but the superannuation death benefit is received by the trustee of the deceased estate instead, under subsection 302-10(2) of the ITAA 1997 the superannuation death benefit so received by the trustee will be exempt from tax as if it were paid to the death benefits dependant of the deceased person direct.

On the other hand, where a person who is not a death benefits dependant (non-dependant) of a deceased person is expected to benefit from a superannuation death benefit in relation to the deceased person but the superannuation death benefit is received by the trustee of the deceased estate instead, under subsection 302-10(3) the trustee of the deceased estate will be treated as if he/she were not a death benefits dependant of the deceased person and will have to pay tax on the superannuation death benefit received, regardless of whether the deceased estate is able to make any distribution to beneficiaries. This is to ensure that if tax is payable on a superannuation death benefit, it will be paid by the appropriate entity.

Under the 'superannuation' heading of section 10-5 of the ITAA 1997 a superannuation lump sum received under subsection 302-145(1) of the ITAA 1997 is a statutory income to be included in the assessable income of the recipient

A definition of 'trustee' is provided in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) as follows:

trustee in addition to every person appointed or constituted trustee by act of parties, by order, or declaration of a court, or by operation of law, includes:

(a) an executor or administrator, guardian, committee, receiver, or liquidator; and

(b) every person having or taking upon himself the administration or control of income affected by any express or implied trust, or acting in any fiduciary capacity, or having the possession, control or management of the income of a person under any legal or other disability.

A 'trustee of a deceased estate' therefore includes an administrator of a deceased estate.

Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant as follows:

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.

Under the court order the de-facto was to receive out of the deceased estate for their maintenance and advancement in life any surplus upon sale of the deceased person's real property. A person entitled to provision out of a deceased estate has to be an eligible person under the Family Provision Act. The definition of 'eligible person' under the Family Provision Act includes, in relation to a deceased person, a person who was living in a domestic relationship with the deceased person at the time of the deceased person's death.

Based on the information provided in the court order, the Commissioner accepts that, for the purposes of subsection 302-10(2) of the ITAA 1997, the de-facto would have been a superannuation death benefits dependant had the administrator distributed to the de-facto as a beneficiary an amount out of the superannuation death benefits which the administrator received from the superannuation funds on behalf of the deceased estate. In other words, the administrator would have been exempt from tax to the extent of the amount distributed to the de-facto.

What was paid to the de-facto from the deceased estate was, however, an agreed amount in full and final settlement of their claim against the deceased estate as a creditor for what they were owed, not a distribution from the deceased estate to them as a beneficiary who was a death benefits dependant of the deceased person. Subsection 302-10(2) of the ITAA 1997 does not, therefore, apply.

By executing the deed of release, the de-facto has relinquished all rights they might have against the administrator and the deceased estate. They will, therefore, not be able to benefit, as a beneficiary who was a death benefits dependant of the deceased person, from the superannuation death benefits received by the deceased estate even if the deceased estate were able to make any distribution to any beneficiaries. It follows that unless there is any other beneficiary (or beneficiaries) who is(are) death benefits dependant(s) of the deceased person, the administrator has to treat all the superannuation death benefits received by the deceased estate as if they had been paid to the administrator as a person who was not a death benefits dependant of the deceased person. In other words, the administrator has to include the total amount of all the superannuation death benefits received by the deceased estates as assessable income of the deceased estate in the year of income in which all the superannuation death benefits were received pursuant to subsection 302-10(3) of the ITAA 1997.

As none of the superannuation death benefits received into the deceased estate contain a tax-free component, each of them will be taxed in accordance with section 302-145 of the ITAA 1997.

The Commissioner has noted that pursuant to the court order the de-facto withdrew the claims they made with the superannuation funds to facilitate payment of superannuation death benefits by the superannuation funds to the deceased estate for meeting the deceased estate's liabilities, notably the amount awarded to the de-facto, and for ultimate distribution to beneficiaries if there is any surplus. However, due to the fact that the de-facto has not benefited, as a beneficiary, from the superannuation death benefits received by the deceased estate, the withdrawal of their claims does not have any relevance in the application of section 302-10 of the ITAA 1997.