Edited version of your written advice

Authorisation Number: 1051467663800

Date of advice: 18 December 2018

Ruling

Subject: Superannuation lump sum tax offset

Question

Was a tax offset correctly applied to the superannuation lump sum payment?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

The Deceased) passed away in the 2015-16 income year.

The Trustee for the Deceased’s Estate (the Trustee) is a relative of the Deceased.

In the 2016-17 income year a superannuation lump sum death benefit (the Payment) was paid from a complying superannuation fund to the Trustee.

The Payment was wholly comprised of a taxable component-taxed element.

There are no dependant beneficiaries in relation to the Payment.

The Deceased Estate’s Trust return for the 2016-17 income year shows 99.46% of the income returned relates to the Payment.

A Notice of assessment for the year ended 30 June 2017 was issued to the Trustee which showed:

● taxable income in excess of $180,000

● a super lump sum tax offset was applied

● a temporary budget repair levy was imposed

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 302-10(1)

Income Tax Assessment Act 1997 Subsection 302-10(3)

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

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

Income Tax (Transitional Provisional) Act 1997 Subsection 4-11(1)

Income Tax (Transitional Provisional) Act 1997 Subsection 4-11(5)

All references are to the ITAA 1997 unless otherwise indicated

Reasons for decision

Summary

The lump sum death benefit payment (the Payment) made by a superannuation fund to the deceased estate after the death of the Deceased is assessed as a death benefit under section 302-10. In this case, the Payment is treated as if it had been paid to a person who was not a death benefits dependant of the Deceased.

As the Trustee for the Deceased’s estate has received the Payment, the benefit is taken to be income to which no beneficiary is presently entitled and the Trustee is liable to pay tax on that income.

A tax offset has been correctly applied to the Payment to ensure that the rate of income tax on the element taxed in the fund did not exceed 15%.

Detailed reasoning

Superannuation death benefits paid to the trustee of a deceased estate

Section 302-10 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.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Under section 302-10, 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 beneficiary or beneficiaries intended to benefit from the estate. The effect of section 302-10 is to tax the death benefit to the same extent regardless of whether the benefit is paid to the beneficiaries directly or through the deceased’s estate.

In this case, as shown by the facts, subsection 302-10(3) applies as the beneficiaries expected to benefit from the superannuation death benefit (the Payment) are not death benefits dependants of the Deceased. Accordingly, the Payment is treated as if it had been paid to a person who is not a death benefits dependant of the Deceased.

Death benefits to a non-dependant

The Payment made to the Trustee, which was made as a superannuation lump sum death benefit, is wholly comprised of a taxable component-taxed element.

Under subsection 302-145(1) the taxable component of the Payment is included in assessable income. However, subsection 302-145(2) provides for a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15%. [Please note, in this case the Medicare levy is not applicable].

Temporary budget repair levy

In accordance with subsections 4-11(1) and 4-11(5) of the Income Tax (Transitional Provisions) Act 1997, a temporary budget repair levy of 2% is payable by an individual in the 2016-17 financial year on the part of their taxable income that exceeds $180,000.00.

In your client’s case, the taxable income for the 2016-17 financial year exceeds $180,000. Therefore, the temporary budget repair levy applicable in your client’s circumstances is calculated as follows:

(Your client’s taxable income - $180,000.00) x 2% = $X

However, the Explanatory Memorandum to the Tax Laws Amendment (Temporary Budget Repair Levy) Bill 2014 (EM) confirms the intent of the legislation is to not impose the additional 2% of income tax on certain types of income subject to an effective tax rate cap. These types of income include parts of employment termination payments, other lump sum payments received on termination of employment and certain superannuation lump sum payments.

The EM details that, while the levy will apply to these payments to the extent that a taxpayer’s taxable income exceeds $180,000.00, a tax offset will be applied to these payments to reduce a taxpayer’s tax liability by the levy amount so that the effective rate of tax applying to these payments does not exceed the relevant cap.

In your client’s case, this means that a tax offset applies to the Payment to ensure the rate of applicable tax does not exceed 15%.

The tax offset that appears on your client’s Notice of assessment for the 2016-17 income year has been correctly calculated, reflecting the fact that the tax on the Payment has not exceeded 15%.