Edited version of your written advice

Authorisation Number: 1051503773816

Date of advice: 11 April 2019

Ruling

Subject: Exempt current pension income.

Question

Does the tax exemption on retirement phase earnings continue to apply for the period from the member’s date of death to the date of payment of the death benefit?

Answer

Yes

This ruling applies for the following periods:

Income year ended 30 June 2016

Income year ended 30 June 2017

Income year ended 30 June 2018

Income year ending 30 June 2019

The scheme commences on:

1 July 2015

Relevant facts and circumstances

The superannuation fund (the Fund) is a self-managed superannuation fund.

The Fund has a corporate trustee (the Trustee), of which the Fund’s sole member was a director.

The principal assets of the Fund include monies held in bank accounts and units in a trust (the Trust).

The principal assets of the Trust are commercial units.

In the 2015-16 income year the sole member (the Deceased) passed away.

At the date of death the Fund was in full pension phase.

The income stream did not automatically revert to another person upon the death of the Deceased.

No amounts other than investment earnings have been added to the Fund on or after the Deceased’s death.

There are no financial dependants or SIS dependants and no binding death benefit nominations in place.

The Trustee has determined that the death benefits will be paid to the Executor for the Estate of the Deceased.

The beneficiaries under the will are the Deceased’s adult children.

No death benefit payments have been made to the beneficiaries due to extensive legal proceedings and complications, those being:

● Proceedings which were on foot prior to the Deceased’s death.

● A court having to appoint a solicitor to be Administrator of the Estate

● Delays in determining the Fund’s assets and obtaining control of the assets from a State Trustee and Guardian.

● The Administrator’s appointment as Director of the Trustee.

● Delays with the sale of the commercial properties.

In the 2017-18 income year the Trustee received the settlement proceeds from the sale of the properties and is in position to pay the death benefit upon receiving certainty in relation to the tax exemption status of the retirement phase earnings.

The applicant stated the death benefit payments will be made soon after the private ruling is issued.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 295-F

Income Tax Assessment Regulations 1997 Regulation 995-1.01

Income Tax Assessment Regulations 1997 Subregulation 995-1.01(2)

Income Tax Assessment Regulations 1997 Subregulation 995-1.01(3)

Superannuation Industry (Supervision) Regulations 1994 Subregulation 6.21(1)

Reasons for decision

Summary

As the relevant requirements in subregulations 995-1.01(1), 995-1.01(2) and 995-1.01(3) of the Income Tax Assessment Regulations 1997 (ITAR 1997) are satisfied, the Fund will be able to claim the tax exemption under subdivision 295-F of the Income Tax Assessment Act 1997 (ITAA 1997) on the retirement phase earnings from the member’s date of death until the date of payment of the death benefit.

Detailed reasoning

Income that a complying superannuation fund derives from assets set aside or used to pay superannuation income stream benefits to members, which would otherwise be assessable income, is deemed to be exempt income where the conditions in subdivision 295-F of the ITAA 1997 are satisfied for an income year. Such income is commonly referred to as exempt current pension income (ECPI).

The ITAA 1997 defines ‘superannuation income stream benefit’ in subsection 307-70(1) as:

A superannuation benefit specified in the regulations that is paid from a superannuation income stream.

Further, the ITAA 1997 also defines ‘superannuation income stream’ with reference to the ITAR 1997. Subregulation 995-1.01(1) of the ITAR 1997 states:

superannuation income stream means:

…

(d) for the purposes of sections 295-385, 295-390, 295-395, 320-246 and 320-247 of the Act one or more rights (whether contingent or not), to the extent that they are covered by subregulation (3). (emphasis added)

The definition of ‘superannuation income stream benefit’ is provided at subregulations (2) to (5) of the ITAR 1997 of which the relevant subregulations in this case are:

Subregulation 995-1.01(2) which states:

Subregulation (3) applies if:

(a) immediately before the death of a person (the deceased), a superannuation interest was supporting a superannuation income stream payable to the deceased; and

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

(c) one or more other persons each have a right (whether contingent or not) to be paid an amount that will be a superannuation benefit from the superannuation interest; and

(d) each such right arises on the death of the deceased and ceases to exist immediately after the payment of the amount mentioned in paragraph (c).

Subregulation 995-1.01(3) which states:

For the purposes of paragraph (d) of the definition of superannuation income stream in subregulation (1), this subregulation covers each such right, to the extent that the value of the superannuation interest has not increased (other than through investment earnings) on or after the deceased’s death.

The above means that where all conditions are satisfied, a superannuation fund will continue to be entitled to the earnings tax exemption for a specified period after the death of a member in relation to earnings on an amount that is subsequently paid as a superannuation death benefit lump sum.

In this case, the sole member of the Fund passed away in the 2015-16 income year. Immediately prior to death the Deceased was in receipt of pension income from the Fund and on the death of the Deceased, the pension did not automatically revert to another person.

The facts show that there are beneficiaries to whom the superannuation benefits will be paid under the Will and that payment has been delayed due to complications which included court proceedings, disputes and issues with the realisation of commercial property.

Further, no amounts other than investment earnings were added to the superannuation interest on or after the Deceased’s death.

All assets of the Fund have been realised and the Trustee is in a position, upon receipt of a private ruling from the ATO, to pay the death benefits to beneficiaries.

In view of the above it is considered the relevant requirements in subregulations 995-1.01(1), 995-1.01(2) and 995-1.01(3) of the ITAR 1997 have been satisfied. Therefore, the Fund payments made by the Fund following the Deceased’s death will be taken to be superannuation income stream benefits for the purposes of claiming ECPI under subdivision 295-F of the ITAA 1997.

Other relevant issues

Death benefits – soon as practicable

Notwithstanding the requirements in subregulations 995-1.01(1), 995-1.01(2) and 995-1.01(3) of the ITAR 1997 have been met it should be noted that under subregulation 6.21(1) of Superannuation Industry (Supervision) Regulations 1994 an SMSF member's benefits must be cashed ‘as soon as practicable' after the death of the member.

Where the trustee pays the benefits to a dependant of the deceased, they may be cashed out as a lump sum or as one or more pensions. For non-dependant beneficiaries the death benefit must be paid as a lump sum.

The Commissioner’s view is that a death benefit lump sum must actually be paid to the beneficiary by transfer of ownership of the deceased member's assets to the beneficiary. Cashing involves an SMSF making a payment which reduces the member's benefits in the fund.

There is no legislative definition of the term 'as soon as practicable'. The Commissioner expects that a trustee will make all reasonable efforts to cash the death benefits in a prompt manner. If there are reasonable delays that can be verified then the ATO may accept the actions of the trustee. The Commissioner will take into consideration any legal issues that prevent the liquidation of fund assets for the payment of the death benefits to the beneficiary.

Generally, where benefits are paid on the grant of probate, which has been delayed due to court action, this would be considered 'as soon as practicable'.

The trustee does not have the option of holding the assets in the fund indefinitely for the purpose of maximising a profit on sale or for the convenience of the relevant entities.

Where death benefits are not paid to the beneficiary 'as soon as practicable' this will result in a contravention of the payment standards.

The facts show that there have been reasonable delays in the payment of death benefits. Provided the death payments are made soon after the issue of this private ruing it would be accepted that the in this case the death benefits will be accepted as being made as soon as practicable.