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Ruling
Subject: Superannuation death benefit
Question
Does the superannuation death benefit which includes the proceeds of a life insurance policy paid by a complying superannuation fund contain an untaxed element of the taxable component?
Answer
Yes.
This ruling applies for the following period
Year ending 30 June 2012
The scheme commenced on
6 July 2011
Relevant facts and circumstances
The deceased died in the 2010-11 income year as a result of an accident.
The deceased was a young adult at the date of death.
The beneficiary of the deceased estate is the deceased's parent who is a non-dependant.
The deceased was employed at the time of his death.
The deceased was a member of a complying superannuation fund (the Fund) whereby compulsory employer contributions were being made into the Fund.
The deceased had also taken out a life insurance policy with the Fund.
In the beginning of the 2011-12 income year, the Fund paid a superannuation death benefit to the trustee of the deceased estate. This amount comprised the insurance proceeds plus total earnings of the fund.
The PAYG payment summary - superannuation lump sum payment shows the entire amount as a taxable component - taxed element.
The Fund verbally advised the trustee of the deceased estate that the Fund claimed the life insurance premiums as tax deductions in its own name.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 295-465.
Income Tax Assessment Act 1997 Section 295-470.
Income Tax Assessment Act 1997 Subsection 302-10(3)
Reasons for decision
Summary
The superannuation death benefit which includes the proceeds of a life insurance policy paid by a complying superannuation fund to the trustee of the deceased estate should contain an element untaxed of the taxable component.
Detailed Reasoning
A complying superannuation fund that provides benefits in relation to death, a terminal medical condition or disability, as detailed in section 295-460 of Income Tax Assessment Act 1997 (ITAA 1997), may claim a deduction under section 295-465 for a portion of the premiums that are paid for an insurance policy which covers these benefits.
Deductions for insurance premiums
Subsection 295-465(1) of the ITAA 1997 states:
A complying superannuation fund can deduct the proportions specified in this table of premiums it pays for insurance policies that are (wholly or partly) for current or contingent liabilities of the fund to provide benefits referred to in section 295-460 for its members. It can deduct the amounts for the income years in which the premiums are paid. (emphasis added)
In relation to the table in subsection 295-465(1), various types of insurance policies are listed, and the proportions of those policies, on which premiums are paid may be claimed as a deduction.
The effect of subsection 295-465(1) of the ITAA 1997 is that the superannuation fund which pays the premium for current or contingent liabilities of the fund (that is, liabilities relating to death, a terminal medical condition or disability) is entitled to claim a deduction.
Section 307-290 of the ITAA 1997, applies to include an element untaxed in the fund of the taxable component of a lump sum superannuation death benefit, when a superannuation fund has claimed, or intends to claim, a deduction under section 295-465 or 295-470.
Furthermore, at Schedule 1, item 1 section 307-290 of the ITAA 1997 the Explanatory Memorandum to the Tax Laws Amendment (Simplification Superannuation) Bill 2006 states:
2.117 If a superannuation provider has claimed a tax deduction in respect of an insurance premium, the element untaxed in the fund of a lump sum superannuation death benefit is increased to broadly reflect the insurance component of the superannuation death benefit. The deductibility of insurance premiums broadly results in no contributions or earnings tax having been paid on this component of the superannuation
death benefit. [Schedule 1, item 1, section 307-290]
Based of the information provided the Commissioner accepts the complying superannuation fund (the Fund) has claimed a deduction in respect of the life insurance premiums under section 295-465 of the ITAA 1997. Consequently, section 307-290 of the ITAA 1997 would apply to include an element untaxed of the taxable component when a lump sum superannuation death benefit paid includes proceeds from a life insurance policy.
Superannuation death benefits made to the deceased estate
A superannuation death benefit paid to the trustee of a deceased estate in that capacity is subject to tax in the following manner:
§ to the extent that one 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 the benefit is treated as if it were paid to a death benefits dependant of the deceased;
§ to the extent that one 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 the benefit is treated as if it were paid to a non-dependant of the deceased, and
§ the benefit is taken to be income to which no beneficiary is presently entitled.
A superannuation benefit may comprise the following:
§ a tax free component;
§ a taxable component which may include:
o an element taxed in the fund; and/or
o an element untaxed in the fund.
In the facts of this case, the deceased had taken out a life insurance policy with the Fund. The deceased estate has received a lump sum superannuation death benefit payment in the 2011-12 income year. The entire amount represents a taxable component. The beneficiary of the deceased estate is a non-dependant (the deceased's parent).
As mentioned previously, the Fund has claimed a deduction in respect of the life insurance premiums under section 295-465 of the ITAA 1997. Section 307-290 applies to include an element untaxed in the fund of the taxable component of a lump sum superannuation death benefit. Therefore, the superannuation death benefit received by the trustee of the deceased estate is made up of taxed and untaxed elements of the taxable component. The entire amount of the superannuation death benefit is assessable income in the hands of the trustee of the deceased estate under subsection 302-10(3) of the ITAA 1997.
Consequently, the amounts ultimately distributed from the deceased estate to the non-dependant beneficiary will not be taxable in the hands of the recipient, because these amounts will represent distributions of the corpus of the deceased estate.