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Ruling

Subject: Superannuation death benefits - Dependant

Questions

1. Will any part of the superannuation death benefit be included as assessable income of the deceased estate if the benefits are to be held in a 'Superannuation Death Benefits Trust' solely for the benefit of dependant beneficiaries?

2. Will any part of the superannuation death benefit be included as assessable income of the deceased estate if part of the benefits are to be paid to a dependant beneficiary and the balance held in a 'Superannuation Death Benefits Trust' solely for the benefit of dependant beneficiaries?

Advice/Answers

1. No.

2. No.

This ruling applies for the following period

For the year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The deceased passed away in the last quarter of the 2010-11 income year.

A copy of the deceased's will dated several months prior to the date of death has been provided.

The deceased has funds held in superannuation with a public fund.

It is proposed that the trustee of the superannuation fund will pay the superannuation death benefits to the Executor of the Estate as a lump sum.

The Executor is seeking confirmation that upon receipt of the death benefits by the Estate that there is no tax liability if the superannuation benefits are held in accordance with a specified clause of the Will or paid to the tax dependants in accordance with another clause of the Will.

The beneficiaries of the Default Superannuation Death Benefits Trust are limited to the tax dependants for superannuation purposes.

We have outlined the material excerpts from the Will.

The deceased's children are under the age of 18 years.

Relevant legislative provisions

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 302-195

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

Income Tax Assessment Act 1997 Subsection 302-200(2)

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 995(1)

Income Tax Assessment Act 1936 Subsection 101A(3)

Summary

The superannuation death benefit to be paid to the Executor of the Estate is not included as assessable income of the deceased estate if the benefits are to be held in a 'Superannuation Death Benefits Trust' solely for the benefit of dependant beneficiaries.

Similarly, the superannuation death benefit to be paid to the Executor of the Estate will not be included as assessable income of the deceased estate if part of the benefit is to be paid to a dependant beneficiary and the balance held in a 'Superannuation Death Benefits Trust' solely for the benefit of dependant beneficiaries.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

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). A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) 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.

The deceased passed away in the last quarter of the 2010-11 income year. It is proposed that a superannuation death benefit will be paid to the Executor of the Estate as a lump sum. The benefits are then to be held in a 'Superannuation Death Benefits Trust' established for the benefit of dependant beneficiaries.

The benefit will be made to the Executor of the Estate during the 2011-12 income year from a public fund because the deceased was a fund member. The proposed 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 as the payment is made to the Executor of the Estate because the deceased is a fund member. This benefit is a superannuation death benefit as defined in subsection 307-5(4).

The superannuation benefit is a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997.

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) 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.

From the facts it is proposed that the superannuation death benefit will be paid to the Executor of the Estate and held in a 'Superannuation Death Benefits Trust' established solely for the benefit of dependant beneficiaries. Alternatively, it is proposed to that the superannuation death benefit will be paid to the Executor of the Estate. Then part of the benefit will be paid to a dependant beneficiary and the balance will be held in a 'Superannuation Death Benefits Trust' established solely for the benefit of dependant beneficiaries.

In both instances, although some or all of the payment will be held in a Superannuation Death Benefits Trust', the payment is still considered to be a superannuation death benefit as it is paid to the Executor of the Estate by the superannuation fund, so therefore 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, where the dependant is not presently entitled to the superannuation death benefit at the time, then the benefit 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 beneficiaries are death benefits dependants 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. Section 302-195 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 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.

From the facts, the beneficiaries are the deceased's partner and the deceased's children, each of whom are under 18 years of age.

The deceased's partner is considered to be a death benefits dependant under paragraph (a) of the definition of 'death benefits dependant' under section 302-195 of the ITAA 1997. As already noted, the deceased's children are both less than 18 years of age. Accordingly, they are considered to be a death benefits dependant under paragraph (b) of the definition of 'death benefits dependant' under section 302-195.

Therefore the deceased's partner and the deceased's children are considered to be death benefits dependants of the deceased under section 302-195 of the ITAA 1997.

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 then:

§ 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. Therefore, any tax liability in respect of the death benefit will be borne by the trustee of the deceased estate and not the beneficiaries.

In this case we have determined that the deceased's partner and the deceased's children are death benefits dependants of the deceased under section 302-195 of the ITAA 1997.

Death benefits to a dependant:

In the case where the payment will be distributed to a dependant beneficiary, the payment is treated as a superannuation death benefit to which section 302-60 of the ITAA 1997 will apply.

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.

Therefore a superannuation lump sum that is paid to a dependant of the deceased is not assessable income and is not exempt income.

However, under subsection 302-10(2) of the ITAA 1997, where a superannuation death benefit is received by the trustee of the deceased estate, the superannuation death benefit will be taxed as if it were paid to the death benefits dependant of the deceased person direct. That is, it will be exempt from tax.

As such, the Trustee of the Estate does not include that income as assessable income.

The amount ultimately distributed from the Estate to the beneficiary will represent a distribution of the corpus of the Estate. Consequently, the amount will not be taxable in that beneficiary's hands.

From the facts presented, it is proposed that the superannuation death benefit will be paid to the Executor of the Estate and:

§ held in a 'Superannuation Death Benefits Trust' established solely for the benefit of dependant beneficiaries; or

§ part of the benefits will be paid to a dependant beneficiary and the balance will be held in a 'Superannuation Death Benefits Trust' established solely for the benefit of dependant beneficiaries.

The beneficiaries are the deceased's partner and the deceased's children. The beneficiaries are death benefits dependants as defined under section 302-195 of the ITAA 1997.

In both instances the superannuation lump sum paid to the Executor of the Estate will ultimately be distributed to the dependants of the deceased. Accordingly, the benefit is not assessable income and is not exempt income. The superannuation death benefit paid to the Executor of the Estate will be exempt from tax as if it were paid directly to the death benefits dependants of the deceased person (subsection 302-10(2) of the ITAA 1997).

Therefore, the Trustee of the Estate does not include any of the death benefit as assessable income of the estate. The amount ultimately distributed from the Estate, either directly or via the 'Superannuation Death Benefits Trust', to the dependant beneficiaries will not be taxable in the beneficiary's hands because the amount will represent a distribution of the corpus of the Estate.