Edited version of your written advice

Authorisation Number: 1051457155286

Date of advice: 20 November 2018

Ruling

Subject: Superannuation death benefit

Question

Will the payment of the balance of the original superannuant’s entitlements in a superannuation fund to the estate of the deceased spouse be a superannuation death benefit paid to a death benefits dependant and be tax-free to the estate or will the tax status be determined by the dependency status of the final beneficiaries of the estate?

Answer

Yes the payment is tax free

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. The original superannuant passed away on XX/mth/20XX.

2. The original superannuant held superannuation monies with a superannuation fund.

3. The original superannuant had made a 100% Binding Death Benefit Nomination (non-lapsing) with the spouse nominated as the 100% beneficiary.

4. The beneficiary was classified as a tax dependant of the original superannuant at the date of death.

5. The beneficiary passed away on XX/mth/20XX.

6. The superannuation fund paid the original superannuant’s death benefit to the estate of the beneficiary. The payment consisted of a taxed element and an untaxed element.

7. The superannuation fund insisted that the death benefit must be paid to the beneficiary’s estate and treated the amount as tax-free (no tax withheld) as it has been paid to a dependant.

8. The beneficiaries of the estate trust are the two adult children of the beneficiary.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Sub-section 302-195(1)

Reasons for decision

The tax treatment of the superannuation death benefits in the hands of the executor/trustee of the deceased estate is determined by the operation of section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 302-10 of the ITAA 1997 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.

To determine how the superannuation fund death benefit payment to the spouse should be treated, it must be established whether he/she is a death benefits dependant or non-dependant beneficiary of the deceased.

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

Subsection 302-195(1) of the ITAA 1997 provides that:

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.

This definition describes a range of possible relationships between a person and the deceased person. Paragraphs (c) and (d) require the relationship to which they refer to exist just before the deceased person’s death. However, paragraphs (a) and (b) do not refer to the time as at which a person can satisfy the paragraph.

The definition of a ‘death benefits dependant’ relates to ‘a person who has died’, the relevant time at which a person satisfies either of paragraphs (a) or (b) of that definition will be tested at the time of the deceased person’s death. Therefore, paragraphs (a) and (b) should be interpreted consistently with paragraphs (c) and (d) as testing a person’s satisfaction of either of those paragraphs is just before the deceased person died.

As the beneficiary was the spouse of the original superannuant, subsection 302-195(1)(a) of the ITAA 1997 applies. The beneficiary passed away a short time after the original superannuant. Even though the beneficiary passed away before the superannuation payment was made, the beneficiary was the original superannuant’s spouse just before the original superannuant died. Therefore, the superannuation fund paid the super lump sum death benefit to the beneficiary’s estate and the benefit received by the estate is considered to be tax free.