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Ruling

Subject: Superannuation income stream - Death of non-spouse member

Question

Are regular payments from a superannuation fund to the deceased estate assessed and taxed in accordance with section 99 of the Income Tax Assessment Act 1936?

Advice/Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

Prior to their death in the 2008-09 income year, the Deceased, who was over 65 years of age, was in receipt of a superannuation pension (the Pension) paid to them as a non-member spouse from a pension scheme (the Scheme).

The Scheme is an 'exempt public sector superannuation scheme' under Schedule IAA to the Superannuation Industry (Supervision) Act 1993.

The Pension was originally received by the Deceased as a result of legal action through the Family Court whereby the Deceased obtained a portion of the estranged spouse's pension.

In a 'Minute of Consent Orders' made in 2006 it was stated that the spouse is a member of the Scheme and had an interest in the Scheme. It was also stated, pursuant to paragraph 90MT(1)(b) of Division 3 of Part VIIIB of the Family Law Act 1975 that

(i)... whenever a splittable amount becomes payable in respect of the interest held by the [spouse] in the [Scheme], the Applicant shall be entitled to be paid [a percentage] of that splittable payment and that there be a corresponding reduction to the entitlement the [spouse] would have received in the [Scheme] but for this order;

(iv) the trustee of the [Scheme], the [spouse] and the [Deceased] in accordance with the obligations set out under the Family Law Act 1975, the Family Law (Superannuation) Regulations 2001, the Superannuation Industry (Supervision) Regulations 1994, shall do all such acts and things and sign all such documents as may be necessary to calculate the entitlement and make payment to the wife in accordance with these Orders.

Subsequent to the Deceased's death, the Scheme has paid, and continues to pay, the Pension to the Deceased's Estate where it is deposited into an account in the name of the Deceased's estate.

The Scheme rules do not allow the payment of benefits as a lump sum. All payments, including those to a reversionary beneficiary, are paid as a lifetime pension.

In a letter dated subsequent to the Deceased's date of death, the Scheme notified:

· the Pension, which is paid fortnightly, will continue to be paid into the Deceased's estate's bank account;

· the Pension would cease upon the death of the Deceased's spouse; and

· twice a year the Pension is adjusted to reflect movements in a Consumer Price Index.

PAYG payment summary - superannuation income stream were prepared by the Scheme for the 2008-09 and 2009-10 income years and show the following:

· Untaxed element

· Tax free component

· Tax offset amount

· Tax withheld

There are no dependant children and all other assets of the Deceased's estate have been distributed to the beneficiaries, the Deceased's two adult children.

To date the Pension payments into the Deceased's estate have not been distributed. The Deceased's estate cannot be fully wound up due to the continued existence of the income stream.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 6

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Section 99A

Income Tax Assessment Act 1997 Section 4-5

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 302-10

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(5)

Income Tax Assessment Act 1997 Subsection 307-5(6)

Income Tax (Transitional Provisions) Act 1997 Section 302-195

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(2)

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(2A)

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(3)

Family Law Act 1975 Paragraph 90MT(1)(b)

Reasons for decision

Summary

Based on the circumstances of this case the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and not subject to any deduction.

Detailed reasoning

The table in subsection 307-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) lists the various types of superannuation benefits. Item 1, column 2 of the table defines a 'superannuation benefit' as being:

A payment to you from a superannuation fund because you are a fund member.

Subsection 307-5(5) and (6) of the ITAA 1997 provide that if a family law superannuation payment is made to a non-member spouse because another person is a member of that fund, the non-member spouse is treated as a member of the fund for the purposes of section 307-5. A 'family law superannuation payment' is defined under subsection 307-5(7) as being a payment that:

(a) is a payment of any of the following kinds:

(i) a payment in accordance with Part VIIIB of the Family Law Act 1975;

(ii) a payment in accordance with the Family Law (Superannuation) Regulations 2001;

(iii) a payment in accordance with Part 7A of the Superannuation Industry (Supervision) Regulations 1994;

(iv) a payment in accordance with Part 4A of the Retirement Savings Accounts Regulations 1997;

(v) a payment specified in the regulations; and

(b) satisfies the requirements (if any) specified in the regulations.

As the Pension is made pursuant to the Family Court Orders made under Part VIIIB of the Family Law Act 1975, in this case the Deceased is/was a member of the Scheme in accordance with those subsections.

Item 1, column 3, of the table in subsection 307-5(1) of the ITAA 1997 specifies that a superannuation fund payment is a superannuation death benefit if it is:

· A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

Section 4-5 of the ITAA 1997 defines the expression 'you' to apply to entities generally unless the application is expressly limited. Therefore 'a payment to you', as specified in subsection 307-5(1) of the ITAA 1997, can refer to a payment to a trustee of a deceased estate.

Based on the table in section 307-5(1) of the ITAA 1997 the payment to the Deceased's estate satisfies the definition of a 'superannuation death benefit'. This is because it is paid to the Deceased's estate from a superannuation fund after the Deceased's death and the Deceased was a fund member under subsections 307-5(5) and (6) of the ITAA 1997.

From 1 July 2007 the form in which a deceased member's benefit may be taken is restricted by subregulations 6.21(2) and (3) of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

Further, under subregulation 6.21(2A) of the SISR, a deceased member's benefits may only be taken in the form of a pension or annuity if, at the time of the member's death, the recipient is:

· a dependent of the member; and

· in the case of a child of the member:

· is less than 18 years of age; or

· if more than 18 years and is less than 25 years and financially dependent on the deceased member or has a disability as described in the Disability Services Act 1983.

The beneficiaries of the Deceased's estate do not meet either of the categories required by SISR. Therefore, the Deceased's benefits must be cashed in the form of a single lump sum or an interim and final lump sum.

However, as the Scheme is an 'exempt public sector superannuation scheme' under Schedule 1AA to the Superannuation Industry (Supervision) Act 1993 (SISA), it is not regulated under the SISA and SISR. Instead, these schemes are subject to supervision under their respective enabling Commonwealth, state or territory Acts. As such, they also conform to the principles of the SIS legislation without formally being subject to it.

Therefore, the Deceased's superannuation entitlements will continue to be paid in the form of a pension split until the Deceased's former spouse dies.

Division 302 of the ITAA 1997 sets out the tax treatment of superannuation death benefits. The tax treatment depends on whether the person receiving the benefit is a dependant of the deceased and whether the amount is paid as a lump sum benefit or an income stream death benefit.

Section 302-10 of the ITAA 1997 applies to superannuation death benefits paid to a trustee of a deceased estate. Under subsection 302-10(3), 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. The benefit is taken to be income to which no beneficiary is presently entitled so that the trustee, rather than the beneficiary, is liable to pay tax on the benefit.

Sections 302-65 to 302-90 of the ITAA 1997 provide the tax treatment of various types of income stream benefits received by dependants of the deceased. Section 302-195 of the Income Tax (Transitional Provisions) Act 1997 extends the meaning of 'death benefits dependant', for the purposes of Division 302 of the ITAA 1997, to include a non-dependant for whom a death benefit superannuation income stream commenced prior to 1 July 2007. However, in this case, the superannuation income stream commenced to be paid to the Deceased's estate after the date of death which occurred in the 2008-09 income year.

It is considered that the payment to the Deceased's estate meets the definitions of 'superannuation benefit' and 'superannuation death benefit' but the current scheme of Division 302 of the ITAA 1997 does not provide for the taxation of a death benefit income stream paid by an exempt public sector scheme to non-dependants or to a deceased estate.

There is nothing expressly stated within Division 302 of the ITAA 1997 that specifies this is the sole provision for the taxation of death benefits. It is arguable that death benefits not expressly contemplated in Division 302 may be dealt with elsewhere in the Income Tax Assessment Act 1936 (ITAA 1936) or ITAA 1997.

Income paid to the deceased estate is held in trust for the beneficiaries of that estate. Division 6 of the ITAA 1936 deals with the income of trusts. In this case, there is clearly a regular and repetitive receipt of income by the Deceased's estate which is considered to be ordinary income of a trust. Therefore the benefit would be included in the net income of the Deceased's estate under section 95 of the ITAA 1936 and taxed in accordance with Division 6.

Based on the circumstances of this case and due to the incomplete administration, the Commissioner has the discretion to tax the income under section 99 of the ITAA 1936. Section 99 provides that the trustee shall be assessed and is liable to pay tax on the net income of the trust estate as if it were the income of an individual who was a resident and not subject to any deduction.