Edited version of your written advice

Authorisation Number: 1051495531393

Date of advice: 29 March 2019

Ruling

Subject: Superannuation Death Benefits

Question

Will payments made by the trustee of the the Fund following the death of the sole member satisfy the requirements of subregulation 995-1.01(3) of the Income Tax Assessment Regulations 1997 (ITAR 1997)?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 201C

Income year ended 30 June 201D

The scheme commences on:

1 July 201B

Relevant facts and circumstances

The Fund is a ‘complying superannuation fund’ and a ‘regulated superannuation fund’ as those terms are defined in the Superannuation Industry (Supervision) Act 1993 (SISA).

The trustee of the Fund (the Trustee) is a corporate trustee.

There was a sole member of the fund.

In the first half of 2012, the Member executed a non-lapsing binding death benefit nomination (the Nomination) to bind the Trustee to pay 100% of the Member’s benefit to their child.

The Fund owned units in a Property Trust (the Unit Trust) which owned a commercial property. The Units in the Unit Trust were to be transferred to the child as part of the death benefit payment (the Transfer).

In the second last quarter of 201B, the Member died.

At the time of the Member’s death, the Trustee was paying superannuation income stream benefits to the member.

In the first quarter of 201C, the Executors filed an application for a Grant of Probate (the Probate) in respect of the Estate.

In the first quarter of 201C, the Probate in respect to the Estate was granted to the Executors.

Mid 201C, the Trustee paid a superannuation lump sum benefit to the child.

Mid 201C, the Executors were appointed as directors of the Trustee.

Prior to their death, the Member had been involved in a long running dispute with their children and the children have previously received a payout from the Member to leave the family business. Consequently these children were estranged from the family and did not benefit greatly under the Member’s Will. This, in the view of the Executors, had created a need for extreme caution in dealing with the Estate and superannuation assets on death.

After the Member’s death, the children indicated to the executors of the Member’s estate (the Executors) that they intended to make a claim under Part IV of the Administration and Probate Act (X) 1958 (the Claim) in relation to the Member’s Estate (the Estate).

In the second last quarter of 201C the other children of the deceased instituted separate proceedings in the Supreme Court of X in relation to the Estate.

The Trustee out of caution was reluctant to pay a superannuation death benefit until the Executors resolved the Estate dispute. Also, in light of the Claims made by the other children, the Trustee was concerned whether they may also challenge the Trustee’s decision to pay the benefit to the child of the deceased.

In the second last quarter of 201C a private ruling application was made to the X State Revenue Office (SRO) in order to seek Stamp Duty relief in relation to the Transfer.

Late 201C, SRO made a ruling that the Transfer would be exempt from stamp duty.

Late 201C, the Trustee paid a final superannuation lump sum benefit to the deceased’s child.

In the first quarter of 201D, an agreement was reached in relation to the claims made by the children, and the Executors entered into a Deed of Settlement with them, effectively concluding matters.

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.