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Edited version of your written advice
Authorisation Number: 1012826262713
Date of advice: 22 June 2015
Ruling
Subject: Superannuation death benefit
Question
Is the trustee of the deceased's estate able to treat the taxable component of a superannuation death benefit lump sum as tax-free because the deceased's original instructions to the superannuation fund were not complied with?
Answer
No
This ruling applies for the following period:
Income year ending 30 June 2015
The scheme commences on:
1 July 2014
Relevant facts and circumstances
The deceased and the deceased's spouse were both suffering from terminal illnesses throughout the 2013-14 income year.
The deceased's spouse had an allocated pension with a superannuation fund (the Fund) with the deceased being the sole beneficiary.
The deceased's spouse passed away during the 2013-14 income year.
As a result of the deceased's poor health, the deceased was advised to withdraw the superannuation benefits from the Fund as a lump sum.
The lump sum would have been tax free as the deceased was a death benefits dependant of the deceased's spouse.
A withdrawal form was submitted to the Fund during the 2014-15 income year. However, the Fund did not action the withdrawal request. According to the Fund, the withdrawal was not actioned because they were instructed afterwards by the deceased's lawyers to instead revert the policy into the deceased's name.
The deceased passed away soon after during the 2014-15 income year.
Later in the 2014-15 income year, the trustee of the deceased's estate (the Trustee) received a payment from the Fund. A payment summary shows the payment as being comprised of a tax free component as well as a taxable component - taxed element.
Relevant legislative provisions
Income Tax Assessment Act 1997 Division 302
Income Tax Assessment Act 1997 Subdivision 302-C
Income Tax Assessment Act 1997 Section 302-10
Income Tax Assessment Act 1997 Section 302-60
Income Tax Assessment Act 1997 Division 307
Income Tax Assessment Act 1997 Subsection 307-5(1)
Income Tax Assessment Act 1997 Subsection 307-5(4)
Reasons for decision
Summary
The taxation treatment of the payment from the Fund to the Trustee is governed by Division 302 of the Income Tax Assessment Act 1997 (ITAA 1997) because the payment is a superannuation death benefit.
Detailed reasoning
Superannuation death benefit
A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as:
… A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.
In the current case, the payment from the Fund to the Trustee is covered by this definition. Even though the lump sum would not have been a superannuation death benefit if the benefits had been withdrawn from the Fund, the facts of the case indicate that no such withdrawal occurred. The payment to the Trustee was in fact a payment from the Fund and so must be categorized a superannuation death benefit. .
Despite the original intention of the deceased, there is no discretion outlined in Division 302 of the ITAA 1997 (in relation to superannuation death benefits), Division 307 of the ITAA 1997 (in relation to superannuation benefits generally), or anywhere else in the tax legislation that allows the Commissioner to treat a superannuation death benefit as though it was something else due to special circumstances.
Tax treatment of a death benefit paid to the trustee of a deceased estate
The taxation treatment of the payment from the Fund is thus governed by Division 302 of the ITAA 1997. According to section 302-10 of the ITAA 1997, the taxation arrangement for the superannuation death benefit paid to the Trustee will be determined in accordance with whether the eventual beneficiaries are death benefit dependants of the deceased.
Effectively, where beneficiaries who are dependants of the deceased are expected to receive part or all of the superannuation death benefit, that part of the death benefit will be subject to tax in the hands of the Trustee as if the Trustee was a dependant of the deceased.
According to section 302-60 of the ITAA 1997, a superannuation death benefit lump sum received by a dependant is not assessable income and is not exempt income.
Similarly, where beneficiaries who are not dependants of the deceased are expected to receive part or all of the superannuation death benefit, that part of the death benefit will be subject to tax in the hands of the Trustee as if the Trustee was not a dependant of the deceased.
According to subdivision 302-C of the ITAA 1997, if a death benefit lump sum is received by someone who is not a dependant, the tax-free component will be tax free while the taxable component of the benefit will be assessable income in the year of receipt. Further, an offset will apply to ensure that the rate of tax on the element taxed in the fund does not exceed 15% and the rate of tax on the element untaxed in the fund does not exceed 30%.