Edited version of your private ruling

Authorisation Number: 1012515927916

Ruling

Subject Taxation of superannuation death benefit

Questions

1. When the balance of the pension account of a deceased member (the deceased member) in the Fund is paid as a superannuation death benefit to an individual who is not a death-benefits dependant, is any part of the balance to paid be tax free?

2. When the balance of the accumulation account of the deceased member in the Fund is paid as a superannuation death benefit to an individual who is not a death-benefits dependant, is any part of the balance to paid be tax free?

Advice/Answers

1. No.

2. No.

This ruling applies for the following period:

Income year ended 30 June 2013

The scheme commences on:

Not applicable

Relevant facts and circumstances

The deceased member and their deceased spouse (the deceased spouse) were members of a superannuation fund (the Fund).

The deceased spouse passed away in the 200X income year aged over 65, leaving a specified balance of benefits in the Fund. The balance consisted entirely of a taxable component. The deceased spouse was not drawing any pension from the Fund at the time of their death.

The Fund's trust deed empowers the trustee of the Fund to pay a superannuation death benefit by way of a pension or a lump sum. The trustee of the Fund elected to use the balance in the member's account of the deceased spouse to start a pension for the deceased member, who was also aged over 65 at the time of the deceased spouse's death.

The deceased member passed in the 20YY income year aged over 65. As at 30 June 20ZZ the balances in the Fund under the deceased member's name were as follows:

(a) accumulation account - a specified amount, consisting entirely of a taxable component;

(b) pension account - a specified amount, consisting entirely of a taxable component.

There is a binding death-benefit nomination directing the trustee of the Fund to pay the balances to the deceased member's estate.

The deceased member had a number of adult children, who are prospective beneficiaries of the deceased member's estate. It has been confirmed that none of them is a death-benefits dependant of the deceased member.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-65.

Income Tax Assessment Act 1997 Section 302-10.

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

Income Tax Assessment Act 1997 Section 302-195.

Income Tax Assessment Act 1997 Subsection 302-195(1).

Income Tax Assessment Act 1997 Paragraph 302-195(1)(a).

Income Tax Assessment Act 1997 Subsection 307-5(1).

Income Tax Assessment Act 1997 Subsection 307-5(4).

Income Tax Assessment Act 1997 Subsection 307-125.

Income Tax Assessment Act 1997 Paragraph 307-125(3(a).

Reasons for decision

Summary

The superannuation death benefit payable to the deceased estate will be income of the estate to which no beneficiary is presently entitled.

As the beneficiaries of the deceased estate are not dependant beneficiaries and the superannuation death benefits, payable to the estate do not contain any tax-free components, the whole of the amount of the superannuation death benefits will be assessable in the hands of the trustee of the deceased estate.

Detailed reasoning

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to payment of superannuation death benefits. Whether a superannuation death benefit received by an individual is assessable income of the individual will generally depend on:

(a) whether the individual is a death-benefits dependant of the deceased person;

(b) whether the superannuation death benefit is paid as a lump sum or as a superannuation income stream;

(c) if the superannuation death benefit is paid as a superannuation income stream, the deceased person's age, and the individual's age, at the time of the deceased person's death; and

(d) what the components of the superannuation death benefit are.

According to subsection 307-5(4) of the ITAA 1997:

A superannuation death benefit is a payment described in column 3 of the table.

Column 3 of the table in subsection 307-5(1) of the ITAA 1997 states that a 'superannuation death benefit' is:

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

Subsection 302-195(1) of the ITAA 1997 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.

As a result of the death of the deceased spouse, the deceased member received from the Fund a superannuation death benefit by way of a superannuation income stream. In the mean time the deceased member continued to maintain their own superannuation benefits in accumulation mode.

The value of the superannuation income stream, and the amount of each of its components, are determined at the time stated in paragraph 307-125(3)(a) of the ITAA 1997, which reads:

If the superannuation benefit is a superannuation income stream benefit - when the relevant superannuation income stream commenced.

The deceased spouse's accumulation account with the Fund consisted entirely of a taxable component. Consequently, the superannuation income stream (or 'pension') that commenced to be payable to the deceased member as a superannuation death benefit likewise consisted entirely of a taxable component.

As a result of paragraph 302-195(1)(a) of the ITAA 1997, the deceased member was a death-benefits dependant in relation to the superannuation death benefit the deceased member received.

Under section 302-65 of the ITAA 1997:

A *superannuation income stream benefit 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 in either or both of the following cases:

(a) you are 60 years or over when you receive the benefit;

(b) the deceased died aged 60 or over.

As the deceased member (being a death-benefits dependant) and their deceased spouse were both over 60 years of age at the time of the latter's death, any superannuation income stream benefit (or 'pension') the deceased member received from the Fund was, therefore, not assessable income nor exempt income. However, any superannuation death benefit in relation to the deceased member's pension account payable after their death will still consist entirely of a taxable component. This is irrespective of whether a beneficiary in receipt of such superannuation death benefit is, or is not, a death-benefits dependant.

As a result of the death of the deceased member, the death benefits were to be paid to the trustee of the estate of the deceased member. Consequently, section 302-10 of the ITAA 1997 will apply. Section 302-10 states:

(1) 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.

(2) 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.

(3) 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.

You have stated that prospective beneficiaries of the deceased member's estate are the adult children of the deceased member. As there is no indication that any of the prospective beneficiaries were dependant on the deceased member prior to the deceased member's death, the prospective beneficiaries would not be considered to be death benefits dependants of the deceased member.

Therefore, subsection 302-10(3) operates to include the taxable component of the superannuation death benefits as assessable income of the deceased member's estate.