Edited version of your written advice

Authorisation Number: 1051458634353

Date of advice: 19 December 2018

Ruling

Subject: Superannuation Death Benefits

Question

Will the earnings of the Fund continue to be exempt current pension income (ECPI) for the purposes of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 20XX

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased was a member of the Fund which was a complying self-managed superannuation fund (SMSF).

Prior to his death, the Deceased had been in receipt of a pension that complied with regulation 1.06(9A)(a) of the Superannuation Industry (Supervision) Regulations 1994. The terms and conditions of the pension did not incorporate a revisionary pensioner.

The Deceased died in late 20XX.

The administration of the Deceased’s estate (Estate) and dealing with the death benefit payable from the Fund took significantly longer than anticipated. This was because the director of the trustee of the Fund was unable to determine to whom the benefits belonging to the Deceased should be paid until the issues relating to the Will were resolved.

Since the death of the Deceased, the key steps which were undertaken in the process of resolving the issues regarding the Will are as follows:

● In early 20XX, the executors and beneficiaries of the Will of the Deceased (i.e. the children and the wife) obtained advice regarding the implications of the Will. The executors/beneficiaries then obtained their own legal advice regarding their own positions;

● In early 20XX, the children all decided to renounce their role as executors of the Will;

● From early to mid 20XX, Probate was obtained in both NSW and Victoria, the children formally resigned as executors and a Deed of Family Arrangement was drafted;

● In mid 20XX Probate was granted.

● In mid 20XX the solicitor dealing with the matter left the employment of the legal firm;

● The legal firm was initially reluctant to release documents relating to the matter and this was not resolved until a later time in 20XX;

● In late 20XX, a new firm of solicitors (Solicitor) was appointed to deal with the matter.

● In late 20XX, the Application for Family Provision Orders was filed to the Supreme Court of NSW by the Solicitor. The filing process involved gathering information, preparation of affidavits from the children and other documents required by the Court.

● In late 20XX, the matter went before the Supreme Court of NSW. The Court ordered that the Deceased’s entitlements in the Fund be designated as notional estate and amended the Deceased’s Will; and

● In early 20XX, the Court Orders issued by the Supreme Court of NSW in later 20XX were attached to the original Grant of Probate and the Court reissued the original grant incorporating the Court Orders.

In early 20XX you applied for a private ruling on behalf of the Fund and made the following contentions:

● the director of the corporate trustee was mindful of the need to deal with the death benefits as soon as practicable, and has recorded the reasons for the delays in administering the Estate and paying the death benefit from the Fund; and

● the director of the corporate trustee of the Fund is only now in a position to pay the superannuation death benefit.

Subsequent to lodging your application you provided us with all the information we had requested in relation to the Fund with the exception of the Deed of Family Arrangement and the Application for Family Provision Orders.

You advised that the Deed of Family Arrangement didn’t eventuate and that it was one of the factors which caused the resolution of the matter to take the time that it did.

In mid 20XX, you stated in an email the following reason(s) as to why the trustee of the superannuation fund was unable to make the payment to the legal personal representative at an earlier time:

● The trustee was unable to make the payment to the legal personal representative because it was not clear whether tax needed to be withheld on the taxable portion of the deceased’s benefits. Until the matter was resolved by the Court it was not certain to whom the benefits would be paid – whether to the deceased’s non-dependent children or to the spouse or a combination thereof, directly or via the estate – and whether, and if so how much, tax needed to be withheld by the super fund from the death benefits payment(s). In additional to this uncertainty, and given that the matter was likely to go before the Courts, the trustee was reluctant to do anything which might affect the legal process. It was anticipated that the matter would be resolved far more quickly than was ultimately the case. The delays were all due to matters beyond the control of the trustee.

● In addition to the above, the matter was further complicated by the new super rules. When the member died, in late 20XX, their pension balance was in excess of $XXX. When probate was granted, in early 20XX the question of how to determine the balance of the member’s account arose. Was the pension balance limited to $XXX with effect from 30 June 2017 and tax payable on earnings in an accumulation account after that time or had the full pension remained in place? This second complication is what prevented the trustee from making the payment to the legal personal representative soon after probate was declared in early 20XX.

In mid 20XX, we contacted you and requested further information in support of your application.

In mid 2018, you provided additional information in relation to your private ruling application. This document stated that trustee of the Fund felt that it was prudent to wait until the grant of probate before paying out the death benefit from the Deceased’s superannuation fund to the nominated legal personal representative. This was because doing this:

● ensured that the death benefit wasn’t paid to the “wrong” executors;

● demonstrated the same degree of care, skill and diligence as an ordinary prudent person would exercise in dealing with property of another for whom the person felt morally bound to provide; and as a result

● mitigated the risk that an aggrieved beneficiary would suffer loss or damage by paying the death benefit to the “wrong” executors.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 295-385.

Income Tax Assessment Act 1997 Section 295-390.

Income Tax Assessment Act 1997 Section 307-70.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Regulations 1997 sub regulation 995-1.01(3).

Reasons for decision

Summary

It is accepted that in this case, the payment of the lump sum will be made as soon as practicable and the earnings of the fund will continue to be ECPI for the purposes of the ITAA 1997.

Detailed reasoning

Sections 295-385 and 295-390 of the Income Tax Assessment Act 1997 (ITAA 1997) provide an income tax exemption for the income of a complying superannuation fund that is supporting current liabilities of superannuation income stream benefits payable by the fund at a particular time.

The term superannuation income stream benefit is defined by the ITAA 1997 with reference to regulation 995-1.01 of the Income Tax Assessment Regulations 1997 (ITAR 1997).

Subregulation 995-1.01(3) of the ITRA 1997 provides:

(3) For the purposes of sections 295-385, 2895-390, 295-395, 320-246 and 320-247 of the Act, if:

(a) a superannuation death benefit that is a superannuation lump sum is paid after the death of a person (the deceased) using only an amount from a superannuation interest; and

(b) immediately before he deceased’s death, the superannuation interest was supporting a superannuation income stream payable to the deceased; and

(c) the superannuation income stream did not automatically revert to another person on the death of the deceased;

the amount paid as the superannuation lump sum, to the extent it is not attributable to any amount (other than investment earnings) added to the superannuation interest on or after the deceased’s death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased’s death until as soon as it was practicable to pay the superannuation lump sum.

In other words, where a death benefit is paid using only an amount from the deceased’s interest that previously supported a pension (and the interest was not reversionary) then the payment will be considered a payment of the original income stream benefit. This is on the condition that no other amounts (apart from investment earnings) have been added to the superannuation interest following the member's death, as is the case here.

However, the payment will only be a superannuation income stream benefit for the period between the member’s death and ‘as soon as it was practicable to pay the superannuation lump sum.’

The Explanatory Statement to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (the ES) gives the following example (Example 3) which explains how a death benefit payment can also be considered as a superannuation income stream benefit:

Arthur was a member of a complying superannuation fund who was receiving a superannuation income stream immediately before his death on 1 September 2012. The income stream did not automatically revert to another person on Arthur’s death and no amounts (other than investment earnings) were added on or after his death to the superannuation interest that was supporting the income stream.

After undertaking a claims staking process, the trustee of the fund determined that the entire value of the deceased member’s benefits in the fund would be paid to the deceased’s widow as a lump sum. On 20 December 2012, which was in the circumstances as soon as practicable after Arthur’s death, a single lump sum of $100,000 was paid to the widow using only an amount from the relevant superannuation interest.

For the purposes of the earnings tax exemption, the $100,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 1 September 2012 until 20 December 2012.

‘As soon as practicable’

The term ‘as soon as it was practicable’ isn’t defined in income taxation legislation.

The Oxford English Dictionary defines the term ‘practicable’ as being able to do or put in practice something successfully.

The Cambridge English Dictionary explains the term ‘practicable’ as capable of being able to be done or put into action.

The Explanatory Statement to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 provides a number of examples where, notwithstanding delay, the payment of a superannuation death benefit will be made ‘as soon as it was practicable’ after a member’s death.

Based on the facts presented, in this case, we can support your contention that the payment of death benefits are to be made as soon as practicable. The earnings of the Fund therefore continue to be exempt current pension income (ECPI) for the purposes of the ITAA 1997.