Edited version of private ruling

Authorisation Number: 1011724050761

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Ruling

Subject: Lump sum superannuation death benefit - non dependant beneficiaries

Questions:

1. Is the superannuation death benefit paid to the deceased estate to be included in the assessable income of the deceased estate?

2. Is the Executor of the deceased estate required to lodge an income tax return for the deceased estate?

Advice/Answers:

1. Yes.

2. Yes.

This ruling applies for the following period:

1 July 2010 to 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts:

Your sibling passed away.

You are the Executor of the deceased estate (the Estate).

You obtained a grant of probate of the Estate.

The Estate was comprised of various assets.

According to their will, your sibling left some assets to you and your other siblings and the residue of the Estate equally to a number of charities.

After the payment of funeral and estate administration expenses, the residue available for distribution includes a death benefit from your sibling's membership of a superannuation fund (the Fund).

The death benefit was received by the Estate in the 2010-11 income year.

Relevant legislative provisions:

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

Income Tax Assessment Act 1997 section 307-5.

Income Tax Assessment Act 1997 subsection 307-5(1)

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

Income Tax Assessment Act 1997 section 307-65

Income Tax Assessment Act 1997 section 307-70

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 302-195

Income Tax Assessment Act 1997 section 302-200(1)

Income Tax Assessment Act 1997 section 302-140.

Income Tax Assessment Act 1997 section 302-145

Income Tax Assessment Act 1997 section 302-195

Income Tax Assessment Act 1936 subsection 101A(3)

Reasons for decision

Summary

As the trustee of the deceased estate has received a superannuation death benefit payable ultimately to non-dependant beneficiaries, it is income to which the beneficiaries are not presently entitled and the trustee is liable to pay tax on that income.

An income tax return must be lodged for the deceased estate by the trustee of the deceased estate.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

For superannuation death benefits paid after 1 July 2007, subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as:

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

A superannuation death benefit must be paid as either:

· a superannuation lump sum; or

· a superannuation income stream.

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 as defined in section 307-70 of the ITAA 1997.

Your sibling, (the deceased) died and a superannuation death benefit was paid to the Estate.

The benefit was made to the Estate during the 2010-11 income year from a superannuation fund after the deceased's death, because the deceased was a member of the superannuation fund. Hence this payment is a superannuation benefit within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997. This benefit is a superannuation death benefit as defined in subsection 307-5(4) of the ITAA 1997.

The superannuation benefit is a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997. As the payment was made by a superannuation fund after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply to the benefit.

Application of section 302-10 of the ITAA 1997

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 as trustee.

As the payment was a superannuation death benefit received from the superannuation fund by the Executor of the Estate, section 302-10 of the ITAA 1997 will apply to the Trustee of the Estate.

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 part or all 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 part of his or her 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 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 his or her assessable income.

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

Subsection 101A(3) of the Income Tax Assessment Act 1936 (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 the deceased taxpayer, that amount shall be included in the assessable income of that year of income of the trust estate.

Subsection 101A(3) 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.

For the purposes of these taxation arrangements it is necessary to determine whether the beneficiary is a death benefits dependant of the deceased.

Death Benefits Dependant' in relation to the Superannuation Death Benefit

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 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.

* denotes a term defined in section 995-1 of the ITAA 1997.

Under section 302-200(1) of the ITAA 1997 an 'interdependency relationship' is defined as:

Two persons (whether or not related by family) have an interdependency relationship under this section if:

(a) they have a close personal relationship; and

(b) they live together; and

(c) one or each of them provides the other with financial support; and

(d) one or each of them provides the other with domestic support and personal care.

Section 302-200(2) of the ITAA 1997 states:

In addition, 2 persons (whether or not related by family) also have an interdependency relationship under this section if:

(a) they have a close personal relationship; and

(b) they do not satisfy one or more of the requirements of an interdependency relationship mentioned in paragraphs (1)(b), (c) and (d); and

(c) the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

In this case, the above would not apply as clearly the charities do not fall within the definition of the dependant and nor could they be in an inter-dependency relationship with the deceased.

Therefore the charities are non-dependant beneficiaries of the deceased.

Tax Treatment of death benefit payments paid to the trustee of a deceased estate

Where the trustee of a deceased estate receives a superannuation death benefit in their capacity as a trustee:

· if a dependant of the deceased is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a dependant, and

· if a person who is a non-dependant is expected to receive part or all of the benefit, it is subject to tax as if it were paid to a non-dependant.

In both cases, the benefit is taken to be income to which no beneficiary is presently entitled.

Death benefits to a non-dependant:

The tax free component of a superannuation lump sum paid to a non-dependant is tax free under section 302-140 of the ITAA 1997. The taxable component of the lump sum is included in assessable income, with a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15% and that the rate of tax on the element untaxed in the fund does not exceed 30%. This is in accordance with section 302-145 of the ITAA 1997. No Medicare levy is added to the rates mentioned above.

In this case as the beneficiaries of the deceased are the non-dependant beneficiaries the superannuation benefit will be taxed as explained above, in the hands of the estate.

When eventually an amount is paid from the estate to a beneficiary it is not to be included in their assessable income because it represents a distribution of the corpus (or capital) of the estate.

The following steps are required to ensure that the superannuation payments are taxed correctly:

The trustee for the estate should lodge a trust estate income tax return for the income year disclosing the taxable component of the superannuation payment and any other income of the estate, as assessable income. The trustee of the estate will have the responsibility of paying the applicable tax.

Therefore the trustee should ensure that money is kept aside to pay the applicable tax.

Beneficiaries do not have to show this income in their personal income tax return for the income year.

The trustee of a deceased estate is also required to lodge a tax return of the deceased's income up to the date of death.