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Ruling

Subject: Superannuation death benefits

Question

Are the superannuation death benefits paid to the trustee of a deceased estate and made to non-dependants of the deceased included in its assessable income in accordance with section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Advice/Answer

Yes.

This ruling applies for the following period

For the year ended 30 June 2011

The scheme commenced on

1 July 2010

The deceased died intestate. The deceased had no spouse or children and both parents were deceased prior to the deceased's death.

The deceased was a resident of mainland Australia.

A certificate issued by the Registrar of Probates in the prescribed territory, confirms that the deceased died in the 2007-08 income year and that administration of the estate (the Estate) was granted to a sibling of the deceased.

The death certificate show the deceased died in a hospital in Australia during the 2007-08 income year.

The beneficiaries of the deceased Estate are:

o relatives who are residents of the prescribed territory, and

o relatives who are residents of Australia.

None of the beneficiaries of the Estate were death benefits dependants of the deceased.

A Superannuation Lump Sum Payment Summary for the year ending 30 June 2011 made to the trustee of the deceased Estate from a superannuation fund (Fund 1) shows:

o a taxable component which comprised:

o a taxed element and

o an untaxed element

o no tax was withheld from the payment.

A Superannuation Lump Sum Payment Summary for the year ending 30 June 2011 made to the trustee of the deceased Estate from a superannuation fund (Fund 2) shows:

o a tax free component

o a taxable component which comprised:

o a taxed element

o no tax was withheld from the payment.

A sibling of the deceased was nominated by the deceased as the beneficiary of Fund 2 payment.

An amount of unclaimed superannuation from the Australian Taxation Office was made in the 2010-11 income year to the deceased Estate.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 24B.

Income Tax Assessment Act 1936 Section 24E.

Income Tax Assessment Act 1936 Section 24G.

Income Tax Assessment Act 1936 Section 27AAB.

Income Tax Assessment Act 1997 Ch3-Pt3-30-Div302.

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 302-145(1).

Income Tax Assessment Act 1936 Subsection 101A(3).

Summary

The beneficiaries of the deceased Estate were not death benefits dependants of the deceased.

The deceased was not a resident of the prescribed territory. Consequently, the trust estate is not a prescribed territory trust, and so is subject to Australian tax.

The tax-free component of a superannuation death benefit is not assessable income and is not exempt income in the hands of the trustee of the deceased Estate, and it is not included in the assessable income of the Estate for the 2010-11 income year.

The taxable component of the superannuation death benefits is included as assessable income in the hands of the trustee of the deceased Estate for the 2010-11 income year. Consequently, each non-dependant beneficiary will not be liable to pay income tax on their share of this amount.

Detailed reasoning

Superannuation death benefits made to a non-dependant:

Where a person dies, his or her superannuation benefit may be paid to another person or to the trustee of a deceased estate. The person may be a dependant or a non-dependant of the deceased person for tax purposes. For tax purposes, a dependant may include any spouse or former spouse of the deceased, his or her children under the age of 18 and any other person who was dependent upon the deceased.

Different taxation arrangements apply to the payment of a superannuation death benefit to a person that is a dependant of the deceased person for tax purposes, in comparison to a person that is not a dependant of the deceased for tax purposes.

Superannuation death benefits paid to a trustee of a deceased estate

Section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with superannuation death benefits paid to a trustee of a 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.

As the payments were superannuation death benefits received from the superannuation funds by the trustee of the deceased estate, section 302-10 of the ITAA 1997 will apply.

Payment made to a death benefits dependant

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.

Payment made to a non dependant

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.

Assessable income of the estate

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.

You have advised that, as the Estate is being administered in the prescribed territory and the Probate was issued in the prescribed territory there is no need to lodge a further tax return regarding the superannuation payments as residents of the prescribed territory do not pay tax. Furthermore, the Administrator of the Estate is not a resident of Australia but a resident of the prescribed territory and that the Estate is being administered from the prescribed territory.

Subsection 24B of the ITAA 1936 defines 'prescribed Territory'.

Subsection 24E(1) of the ITAA 1936 states:

A trust is, for the purposes of this Division, a Territory trust in relation to the year of income if:

(a) the trust resulted from:

(i) a will, a codicil or an order of a court that varied or modified the provisions of a will or codicil; or

(ii) an intestacy or an order of a court that varied or modified the application, in relation to the estate of a deceased person, of the provisions of the law relating to the distribution of the estates of persons who die intestate;

(b) the deceased person was a Territory resident immediately before his or her death; and

(c) either of the following subparagraphs applies in relation to the trust:

(i) the administration of the estate of the deceased person had not, before the end of the year of income, progressed to a stage that would give to any beneficiary a present entitlement to income that was derived by the trustee before or during the year of income; or

(ii) at no time during the year of income was any person presently entitled to income derived by the trustee during the year of income and at the end of the year of income no person other than a Territory resident had any interest, whether vested or contingent, in any income derived by the trustee during the year of income or could by the exercise of a power conferred on any person obtain such an interest

Section 24G of the ITAA 1936 provides an exemption from tax of certain income derived from sources in a prescribed territory.

Furthermore, subsection 24G(1) of the ITAA 1936 states:

Subject to subsections (2) and (3), this section applies to:

(a) income derived (otherwise than as a trustee) from sources in a prescribed Territory by a person who is a Territory resident;

(b) income derived (otherwise than as a trustee) from sources in a prescribed Territory by a company that is a Territory company in relation to the year of income;

(c) income derived from sources in a prescribed Territory by a trustee of a trust that is a Territory trust in relation to the year of income;

(d) income derived from sources in a prescribed Territory by a trustee of a trust, being income to which a beneficiary who is under a legal disability and is a Territory resident is presently entitled; and

(e) income derived by a person from an office or employment the duties of which are wholly or mainly performed in a prescribed Territory, if the Commissioner is satisfied that, at the time when the person commenced to perform duties of that office or employment in that Territory, he or she intended to remain in that Territory for a continuous period of more than 6 months.

In this case, the payments made to the Estate were made from Australian resident superannuation funds based in mainland Australia and not the prescribed territory. Therefore payments from these funds are sourced in Australia.

Further, the deceased was born and died in Australia, and had been living and working in mainland Australia for an Australian employer who paid benefits into these Australian superannuation funds.

As stated under paragraph 24E(1)(b) of the ITAA 1936, if the deceased person was a Territory resident immediately before his or her death then the Estate would be considered to be a Territory trust.

As the deceased was not a Territory resident immediately before the deceased's death, the Estate is not a Territory trust.

Consequently, the payments made from the Australian funds are not exempt and are to be included as assessable income of the deceased Estate, according to their components.

Taxation of superannuation benefit

Section 302-145 of the ITAA 1997 discusses the receipt of a superannuation lump sum and whether the lump sum was an element taxed or element untaxed in the fund.

Subsection 302-145(1) states:

If you received 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.

In the facts of this case, superannuation death benefits were made to the trustee of the deceased Estate in the 2010-11 income year. The benefits made from Fund 1 included a taxable component which included a taxed element and an untaxed element with no tax withheld.

The benefits made from Fund 2 shows a tax free component and a taxable component - taxed element with no tax withheld.

In addition, an amount of unclaimed superannuation from the Australian Taxation Office was made in the 2010-11 income year to the deceased Estate.

The beneficiaries of the deceased Estate are non-dependants of the deceased, therefore the superannuation death benefits received by a non-dependant will not attract the additional concession available to a 'death benefits dependant', but rather is assessable to the estate according to the components.

Consequently, subsection 302-10(3) of the ITAA 1997 treats the superannuation death benefits as being paid to the trustee as a person who was not a death benefits dependant, and the benefit is taken to be income to which no beneficiary is presently entitled.

As noted above, the tax free component is not assessable and is not exempt income, therefore no tax is payable on this amount.

However, the taxable component amounts are included as assessable income in the income tax return of the deceased Estate for the 2010-11 income year under subsection 302-10(3) of the ITAA 1997.

Consequently, the trustee is assessed in their own right, rather than in separate assessments on account of the beneficiaries.

Section 302-145 of the ITAA 1997 will assess the trustee of the deceased Estate to tax at a maximum rate of 30% in respect of the untaxed element of the payments, and 15% in respect of the taxed element, via the operation of relevant tax offsets.