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Ruling

Subject: Death benefits

Questions

Does the superannuation fund (the Fund) have to withhold tax (PAYG) on a superannuation death benefit paid to the Estate of member 2 of the Fund (the Estate), being a superannuation lump sum payment representing the balance of the benefits of member 2's deceased de facto spouse's (member 1's) benefits in the Fund?

Does the Fund have to withhold tax (PAYG) on a superannuation death benefit paid to the Estate, being a superannuation death benefit to the Estate and the beneficiaries are not death benefits dependants?

Is the superannuation death benefit received from the Fund representing the total benefits of member 2's superannuation fund account assessable income of the Estate ?

Answers:

No

Yes

Yes

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commenced on:

1 July 2011

Relevant facts:

The superannuation fund (the Fund) is a self-managed superannuation fund established by Trust deed dated in June 2003 and subsequently varied in July 2008 (the Trust deed).

The Fund trustees, member 1 and member 2 (now both deceased) were also the only members of the Fund.

In December 2007, member 1 signed a binding death benefit nomination directing the Fund trustees to pay 100% of her benefits in the Fund to member 2 (her de facto spouse) on her death.

Both the Trust deed and the binding death benefit nomination did not contain a provision to pay her entitlements in the Fund as a reversionary pension to member 2.

A clause of the Trust deed stated that the trustee must cash or commence to cash a member's benefit entitlement as soon as practicable after the member dies.

Another clause of the Trust deed stated that after the death of a member who has given a binding death benefit notice, the trustee must comply with that notice.

Member 2 became the sole trustee and sole member after member 1 died in September 20XX.

At the time of her death member 1 was drawing a pension from the Fund with the amount standing to the credit of her member account at $X.

In September 20XX member 2 as sole trustee of the Fund passed a trustee resolution noting the death of his de facto spouse (member 1) which stated that as of September 2009, the balance of the benefits in the account of member 1 shall be transferred to the account of member 2.

Member 2 died in November 20XX.

By deed of appointment of the new trustees dated in July 2010, new trustee 1 and new trustee 2 became the new trustees of the Fund.

New trustee 2 was also the executor of the Estate of member 1.

New trustee 1 and new trustee 2 are the executors of the Estate of member 2.

As the two members (who were also the Fund trustees) had died, the new Fund trustees commenced the process of liquidating the Fund's assets to enable the deceased members' benefits to be paid as a first step towards winding up the Fund.

Member 1 did not have any dependants other than her de facto spouse (member 2) at the time of her death.

Member 2 did not have any dependants at the time of his death.

At the time of his death in November 20XX, member 2 was drawing a pension from the Fund with the amount standing to the credit of his member account at $Y.

A specific clause of the Trust deed stated that "if after the death of a member not all death benefits have been paid in accordance with a death benefit agreement or binding death notice then the trustee must pay or apply the relevant benefit in the way the trustee thinks fit in accordance with the following rules…If the member has not left any dependants but does have a legal personal representative, then the trustee must pay the benefit to the legal personal representatives of the member or beneficiary."

Probate of the estate of member 2 was granted in May 20XX.

The Fund assets comprised of bank deposits, a share portfolio and rural real estate (comprising of a large percentage of the net assets available to pay benefits).

The global financial crisis and economic position affected sales of non agricultural rural properties at an acceptable price resulting in the last property of the Fund being sold with settlement occurring in December 20XX.

The Fund will be paying capital gains tax (CGT) on property sales and income tax on investments.

Following completion of the discharge of the Fund liabilities, the new Fund trustees propose to pay to the Estate of member 2 the amount owed pursuant to member 1's binding death nomination without any PAYG withholding.

The proposed payment will represent the amount of member 1's entitlements in the Fund at date of death plus net income (if any) earned on investment of that amount up to the date of payment (net of the income tax payable on the invested amount).

The new Fund trustees propose to subsequently pay to the Estate of member 2 (the Estate) the balance remaining in the Fund without any PAYG withholding or payment of tax on the amount.

The executors of the Estate will receive such payment as a superannuation member benefit and pay tax of 16.5% on the taxable component of the lump sum payment.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 292-25

Income Tax Assessment Act 1997 Subsection 292-25(3)

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 302-10(3)

Income Tax Assessment Act 1997 Section 302-140

Income Tax Assessment Act 1997 Section 302-145

Income Tax Assessment Regulations 1997 Regulation 292-25.01

Income Tax Assessment Regulations 1997 Regulation 292-25.04

Superannuation Industry (Supervision) Act 1993 Section 19

Superannuation Industry (Supervision) Act 1993 Section 45

Superannuation Industry (Supervision) Regulations 1994 Division 7.2

Taxation Administration Act 1953 Subsection 12-1(1A) of Schedule 1

Taxation Administration Act 1953 Paragraph 12-85(a) of Schedule 1

Reasons for decision

Summary

The proposed payment of the balance of member 1's entitlements in the Fund to the Estate of member 2 (the Estate) will be a superannuation death benefit paid to a death benefits dependant and not subject to PAYG withholding.

The proposed payment by the Fund to the Estate representing member 2's total benefits in the Fund will be a superannuation death benefit paid to the trustee of the Estate and treated as if it was to be paid to the trustee of the Estate as a person who was not a death benefits dependant of the deceased and will be subject to PAYG withholding.

The benefit is taken to be income to which no beneficiary is presently entitled and will be subject to tax in the hands of the Estate as assessable income of a death benefits non-dependant of the deceased.

Detailed reasoning

Superannuation death benefit

Where a person dies, his or her superannuation benefit may be paid to another person (or to the trustee of a deceased estate). This person may be a dependant or a non-dependant of the deceased person. For taxation purposes, a dependant may include a de facto spouse.

Different taxation arrangements apply to the payment of a superannuation death benefit to a person who is a death benefits dependant of the deceased and to a person who is a non-dependant of the deceased.

Under section 302-60 of the Income Tax Assessment Act 1997 (ITAA 1997), a superannuation lump sum paid to a death benefits dependant is not assessable income and is not exempt income. This means the superannuation lump sum death benefit paid to a dependant of the deceased is tax free.

Under section 302-145, if you are not a death benefits dependant, the tax-free component of a superannuation lump sum death benefit is not assessable income and is not exempt income. Therefore the person is not liable to pay tax on the tax-free component. The taxable component of the superannuation lump sum is assessable income, and is taxed at 15% plus medicare levy for the element taxed in the fund. A tax offset may apply to the element taxed in the fund to ensure the maximum rate of tax is 15% plus the medicare levy.

The taxation treatment of a superannuation death benefit paid to the Estate:

Section 302-10 of the ITAA 1997 applies to a trustee of a deceased estate who receives a superannuation death benefit in their capacity as trustee.

Subsection 302-10(3) specifies that, to the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased is expected to benefit from the estate, the benefit is treated as if it were paid to the trustee as a person who was not a death benefits dependant of the deceased.

A superannuation death benefit may be received by a person acting as a trustee of a deceased estate. The taxation arrangements that apply to this superannuation death benefit are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the estate.

This means that where a dependant of the deceased is expected to receive part or all of a superannuation death benefit, the whole amount is not assessable income and not exempt income and will be not be subject to tax.

As member 2 was a death benefits dependant of member 1, the proposed payment of member 1's benefits to the Estate of member 2 (the Estate) will be paid by the Fund to the trustee of the Estate as a person who is a death benefits dependant. The payment is not assessable income and is not exempt income. It is also not subject to PAYG withholding in accordance with subsection 12-1(1A) of Schedule 1 to the Taxation Administration Act 1953 (TAA).

Where a person is not a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent. However, it is also clear that the non-dependant is not presently entitled to this superannuation death benefit at this time and therefore is assessable income in the hands of the trustee as a person who is not a death benefits dependant.

As the new Fund trustees have advised there are no death benefit dependants of member 2, the proposed payment to the Estate of member 2's benefits will be a superannuation death benefit paid to the trustee of the Estate in accordance with subsection 302-10(3) of the ITAA 1997.

The superannuation death benefit will be subject to tax as if it were paid to a non-dependant of the deceased and subject to PAYG withholding. This is in accordance with the requirement for an entity to withhold tax at the rate of 16.5% (including the medicare levy) from the whole amount of the taxable component of a superannuation lump sum paid to an individual (Paragraph 12-85(a) of Schedule 1 to the TAA 53).