Edited version of private ruling

Authorisation Number: 1011855652348

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Ruling

Subject: Taxation of death benefit - superannuation income stream

Questions

Is any part of the pensions paid to you on the death of your spouse included in your assessable income for the 2005-06 and 2006-07 income years?

Is any part of the pensions paid to you on the death of your spouse included in your assessable income for the 2007-08, 2008-09 and 2009-10 income years?

Advice/Answers

Yes.

No.

This ruling applies for the following period

Year ending 30 June 2006

Year ending 30 June 2007

Year ending 30 June 2008

Year ending 30 June 2009

Year ending 30 June 2010

The scheme commenced on

1 July 2005

Relevant facts

You are a death benefits dependant of the deceased.

You are in receipt of pensions (the Pensions) as a result of the deceased's death.

The deceased was over the age of 60 on the date they passed away.

Between the 2005-06 income year, when the Pensions commenced, and the 2010-11 income year tax was withheld from the Pensions.

In a letter the fund advised you that no amount of the Pensions for the 2005-06 income year was tax free, but you were entitled to a tax offset.

In a letter the fund advised you that no amount of the Pensions for the 2006-07 income year was tax free, but you were entitled to a tax offset.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 159SJ(1)

Income Tax Assessment Act 1936 Section 159SM

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 302-65

Income Tax Assessment Act 1997 Section 307-5

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

Reasons for decision

Summary of decision

The Pensions are a superannuation death benefit. In the 2007-08 and later income years, the Pensions are not assessable income and are not exempt income. This means these pensions are not taxed.

In the 2006-07 and prior income years, the Pensions are included in your assessable income and taxed at personal marginal tax rates, however, you are entitled to a 15% tax offset.

Detailed reasoning

From 1 July 2007 Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to the payment of superannuation death benefits from a complying superannuation fund.

Subsection 995-1(1) of the ITAA 1997 provides that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997. Section 307-5 defines a 'superannuation death benefit' as being a payment to a person from a superannuation fund, after another person's death, because the other person was a fund member.

The tax treatment of a 'superannuation death benefit' depends on whether the recipient of the benefit is a dependant or non-dependant of the deceased and whether the amount is paid as a lump sum or as an income stream.

Section 302-65 of the ITAA 1997 deals with superannuation income streams where either the deceased died aged 60 or above or the dependant is aged 60 or above and states:

A superannuation income stream benefit 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 in either or both of the following cases:

(a) you are 60 years or over when you receive the benefit;

(b) the deceased died aged 60 or over.

In this case you are a death benefits dependant of the deceased. You are in receipt of the Pensions as a result of the deceased's death. Therefore, the Pensions are a superannuation death benefit. In addition, the deceased was over the age of 60 on the date they passed away. Hence, in the 2007-08 and later income years, the Pensions are not assessable income and are not exempt income.

Prior to 1 July 2007 section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) applied to include annuities and superannuation pensions in a person's assessable income.

A 15% tax offset was available in relation to certain superannuation pensions and annuities. The rebate for superannuation pensions was allowable under section 159SM of the ITAA 1936. According to that section, the rebate applied to the 'rebatable 27H amount'.

A 'rebatable 27H amount' was defined under to subsection 159SJ(1) of ITAA 1936 to mean:

'rebatable 27H amount', in relation to a rebatable ETP annuity or a rebatable superannuation pension and in relation to a year of income, means:

(a) if:

I. the 55th birthday of the recipient of the annuity or pension occurred before the year of income; or

II. the annuity or pension is a death or disability annuity/pension for the recipient;
an amount included in assessable income under section 27H in respect of the annuity or pension; or

(b) in any other case - so much (if any) of an amount included in assessable income under section 27H in respect of the annuity or pension as is attributable to a payment of the annuity or pension made on or after the recipient's 55th birthday;

It follows from the definition of 'rebatable 27H amount', as stated above, that for a person to be entitled to the 15% tax offset under section 159SM of the ITAA 1936, the pension must be a 'death or disability annuity/pension'.

A 'death or disability annuity/pension' was defined according to subsection 159SJ(1) to mean:

'death or disability annuity/pension', in relation to a person, means:

(a) an annuity or superannuation pension provided to the person in the event of the death of another person; or

(b) an annuity or superannuation pension provided to the person:

I. if the first payment date for the annuity or superannuation pension is before 1 July 1994 - in the event of the permanent disability of the person; or

II. if the first payment date for the annuity or superannuation pension is on or after 1 July 1994 - in the event of the disability of the person, where 2 legally qualified medical practitioners have certified that the disability is likely to result in the person being unable ever to be employed in a capacity for which the person is reasonably qualified because of education, training or experience;

From the facts it is clear that the Pensions satisfy the definition of a 'death or disability annuity/pension' and 'rebatable 27H amount'. The letters from the fund in respect of the 2005-06 and 2006-07 income years correctly identify your Pensions in this regard.

Therefore, in the 2006-07 and prior income years, the Pensions are included in your assessable income and taxed at personal marginal tax rates, however, you are entitled to a 15% tax offset.