Edited version of your written advice

Authorisation Number: 1051361817120

Date of advice: 14 May 2018

Ruling

Subject: Death benefit

Question

Are the beneficiaries of the estate of the deceased considered to be death benefits dependants in accordance with section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question

Will the death benefit be treated as non-assessable income and not exempt income in the hands of the trustee?

Answer

Yes

This ruling applies for the following period:

For the year ended 30 June 201X

The scheme commences on:

1 July 201X

Relevant facts and circumstances

The deceased died on a date in the 201X-201X income.

The beneficiaries of the estate are the deceased’s children.

At the time of death, one of the deceased’s children was over 18 years of age and was financially dependent on the deceased.

At the time of death, the deceased’s other child was less than 18 years of age.

At the time of death of the deceased, the adult child was receiving substantial financial support from the deceased.

The death benefit was paid to the estate and no tax was withheld.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 302-10(2)

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-195(1)(b)

Income Tax Assessment Act 1997 Section 302-195(1)(d)

Income Tax Assessment Act 1997 Section 307-5(1)

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 995-1(1)

Reasons for decision

The deceased died during the 201X-1X income year.

In accordance with Section 302-195(1)(d) of the Income Tax Assessment Act 1997 (ITAA 1997), the deceased’s child who was over the age of 18 at the time of the death but who was reliant on the deceased for financial support, is treated as a death benefit dependant for tax purposes in respect of the lump sum death benefit.

In accordance with Section 302-195(1)(b) of the ITAA 1997, the deceased’s child who was under the age of 18 at the time of death, is treated as a death benefit dependant for tax purposes in respect of the lump sum death benefit.

Therefore, in accordance with Section 302-60 of the ITAA 1997, the two superannuation death benefits are not assessable income and are not exempt income in the hands of the trustee of the estate. As the death benefits are tax-free, the benefits are not included in the assessable income of the estate and each beneficiary will not be liable to pay income tax on each share of the benefit.

Detailed reasoning

Division 302 of the ITAA 1997 sets out the taxation arrangements that apply to the payment of superannuation death benefits. These arrangements depend on whether the person that receives the superannuation death benefit is a dependant of the deceased or not and whether the amount is paid as a lump sum superannuation death benefit or a superannuation income stream death benefit.

Superannuation death benefits paid to the trustee of a deceased estate

A superannuation death benefit, as defined in section 307-65 of the ITAA 1997 was paid to the estate and no tax was withheld.

Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to the trustee of a deceased estate. Subsection 302-10(1) states:

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.

As the superannuation lump sum death benefit from the fund was made to the trustee of the estate, section 302-10 of the ITAA 1997 will apply.

In accordance with subsection 302-10(2) of the ITAA 1997, the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise intended to benefit from the deceased estate.

This means that, where a dependant of the deceased receives or will receive part or all of a superannuation death benefit, the lump sum will be subject to tax as if it were paid to a dependant of the deceased, and the death benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(2) of the ITAA 1997).

Similarly, where a person who is not a dependant receives or will receive part or all of a superannuation death benefit, the benefit will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(3) of the ITAA 1997).

Superannuation death benefits will be treated concessionally if dependants of the deceased will benefit from the estate. Where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, the benefit is not assessable income and is not exempt income, that is, it is tax-free.

Death benefits dependant in relation to the superannuation death benefits

Subsection 995-1(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195.

Section 302-195 of the ITAA 1997 defines the meaning of death benefits dependant and states:

(1) 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.

Death benefits dependants of the Deceased

As the estate received a superannuation lump sum payment from the fund because of the death of the deceased, and as the beneficiaries will benefit from the lump sum death benefit paid by the fund in respect of the deceased, subsection 302-195(1) of the ITAA 1997 treats the beneficiaries as the death benefits dependants of the deceased.

As the deceased’s adult child was financially reliant on the deceased at the time of his death, this person is considered to be a death benefit dependant under paragraph (d) of Section 302-195 of the ITAA 1997.

As the deceased’s other child was aged less than 18 at the date of death of the deceased, this person is considered to be a death benefit dependant under paragraph (b) of Section 302-195 of the ITAA 1997.

The treatment of the superannuation lump sum death benefits paid to the estate

The superannuation lump sum payment was paid by the fund to the estate in the 201X-1X income year.

Section 302-60 of the ITAA 1997 provides that where a person receives a superannuation lump sum death benefit and the recipient was a death benefits dependant of the deceased, the superannuation lump sum is not assessable income and is not exempt income in the recipient’s hands. It follows, therefore, that the recipient is not liable to pay tax on the superannuation lump sum death benefit.

Therefore in accordance with subsection 302-10(2) of the ITAA 1997, the benefits are treated as superannuation death benefits to which section 302-60 applies and are not assessable income and are not exempt income in the hands of the trustee of the Estate.