Edited version of your written advice

Authorisation Number: 1012705269358

Ruling

Subject: Taxation of death benefit

Question

Is tax payable on a lump sum superannuation death benefit payment to a non-resident non-dependant beneficiary?

Answer

Yes.

This ruling applies for the following period:

2014-15 income year

The scheme commences on:

1 July 2014.

Relevant facts and circumstances

The Fund is a self-managed superannuation fund.

The Fund has a corporate trustee.

The Member is the only member of the Fund.

A binding death benefit nomination has been lodged by the Member advising that in the event of the member's death, the death benefit is to be paid to a relative who is a non-resident and non-dependant.

You believe that the death benefit payable to the relative would, to the extent that it is the taxable component, be taxed at a minimum rate of 15% plus Medicare Levy, and that the tax-free component would not be subject to tax.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 subsection 302-140

Income Tax Assessment Act 1997 subsection 302-145(1)

Income Tax Assessment Act 1997 Subsection 302-145(2)

Reasons for decision

Summary

The taxable component - element taxed of a superannuation death benefit is assessable income in the non-dependant non-resident's hands in the income year in which it is paid. However, a tax-offset will apply to ensure the rate of income tax on the taxable component - element taxed does not exceed 15%.

The tax free component is not assessable income and is not exempt income.

Non-residents are not liable to pay the Medicare Levy.

Detailed Reasoning

Taxation of the superannuation death benefit

Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the taxation arrangements that apply to the payment of superannuation death benefits.

Subsection 302-145(1) of the ITAA 1997 provides that where a person receives a superannuation lump sum from an Australian complying superannuation fund and the recipient was not a death benefits dependant of the deceased, the taxable component of the lump sum is assessable income in the recipient's hands.

For the purposes of subsection 302-145(1) of the ITAA 1997, the fact the recipient may not be a resident of Australia for tax purposes is not relevant.

From the facts of this case, in the event of the Member's death, a superannuation death benefit will be made from the Fund to a relative. The total benefit may consist of a taxable component - element taxed and a tax-free component.

The taxable component - element taxed is fully included as assessable income in the relative's Australian tax return in the income year in which it is paid in accordance with subsection 302-145(1) of the ITAA 1997. This is notwithstanding that the relative is not a resident of Australia for tax purposes.

However, under subsection 302-145(2) of the ITAA 1997 the relative is entitled to a tax offset that ensures the rate of income tax on the element taxed in the fund of the lump sum payment does not exceed 15%. To obtain this tax-offset, the relative will need to lodge an Australian income tax return for the income year in which the payment is received, and disclose the death benefit in the relative's return.

Under section 302-140 of the ITAA 1997, any part of a death benefit payment which forms a tax free component is not assessable income and is not exempt income. Please note that the relative is not liable to pay Medicare Levy if the relative is a foreign resident for the entire income year in which the death benefit is paid.