Edited version of private advice

Authorisation Number: 1051622519352

Date of advice: 30 January 2020

Ruling

Subject: Death benefits

Question 1

Did the Deceased die in line of duty for the purposes of section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes

Question 2

Will the untaxed element of the death benefit paid from Australian Defence Force (ADF) cover be tax free when paid to the Deceased Estate?

Answer 2

Yes

Question 3

Will the benefit subsequently distributed to the Deceased's parents (the Parents), who are eligible non dependants for tax purposes, be tax free?

Answer 3

Yes

Question 4

Will the refund of contributions from ADF super be tax free when paid to their Estate and subsequently distributed to the Deceased parents?

Answer 4

Yes

This ruling applies for the following period:

Year ending 30 June 2020

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The Deceased entered the Australian Defence Force (ADF) in 20XX.

The Deceased started their 12 week period of standard basic training in a State in Australia. One week out of graduation from training, the Deceased had an accident while on a supervised training course.

The Applicant contends that to the best of their knowledge the ADF hadn't supplied or enforced any specific protection at any stage.

As a result of the event, the Deceased passed away at an Australian Hospital from injuries a number of days later, in 20XX.

The Applicant further contends that they have been advised that at the time of their death, the Deceased was considered to be of specific Rank, meaning the Deceased recruitment stage had been graduated from.

A copy of the state of Australia Death Certificate states the cause of death is pending.

A copy of a death certificate from the ADF states the Deceased had the rank of private when they died.

A copy of a letter of condolence to the parents of the Deceased from the Chief of Army has been provided.

A lump sum death benefit was paid from ADF Cover to their Estate, with the refund of contributions paid from ADF Super to their Estate.

The Applicant advises that the benefits have been paid by the Commonwealth Superannuation Corporation (CSC) to the Estate and then distributed to the beneficiaries of the Estate, their Parents.

The post mortem autopsy report for the coroner records the cause of death injury, which occurred during a military training exercise.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Subsection 302-195

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Subsection 307-125(2)

Income Tax Assessment Act 1997 Section 307-210

Income Tax Assessment Act 1997 Subsection 307-220(1)

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

Income Tax Assessment Regulations 1997 Regulation 302-195

Income Tax Assessment Regulations 1997 Regulation 302-195A

Reasons for Decision

Summary

The Deceased died in the line of duty as a member of the ADF.

The Parents are therefore death benefit dependants of the deceased.

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 person or persons otherwise intended to benefit from the deceased estate. As the Parents are dependants of the deceased the lump sum is tax free to the Estate.

The Payment is a superannuation lump sum benefit and will be tax free when paid to the trustee of the Estate and the Parents.

The return of contributions is tax free to the Estate and the Parents.

Detailed reasoning

In the line of duty

Section 302-60 of the ITAA 1997 provides that a superannuation death benefit paid as a lump sum to a person who is a death benefit dependant is not assessable income and is not exempt income of the person.

By virtue of subsection 995-1(1) of the ITAA 1997, a death benefit dependant is defined in subsection 302-195(1) of the ITAA 1997 as:

(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.

In addition, subsection 302-195(2) of the ITAA 1997 treats an individual who receives a superannuation lump sum because of the death of another person as a death benefits dependant of the deceased person in relation to the lump sum if the deceased person 'died in the line of duty' as:

(a) a member of the Defence Force; or

(b) a member of the Australian Federal Police or the police force of a State or Territory; or

(c) a protective service officer (within the meaning of the Australian Federal Police Act 1979).

Subsection 302-195(3) of the ITAA 1997 states that for the purposes of subsection (2), a person is taken to have died in the line of duty if the person died in the circumstances specified in the regulations.

For subsection 302-195(3) of the ITAA 1997, regulation 302-195 of the Income Tax Assessment Regulations 1997 (ITAR) sets out the circumstances in which a deceased person died in line of duty.

A specified circumstance under subsection 302-195(4) of the ITAA 1997 is where a military person dies as a result of sustaining an injury while performing the duties of a military person.

Subregulation 302-195A of the ITR 1997 sets out the circumstances in which a person is not taken to have died in line of duty, unless regulation 302-195 of the ITAR 1997 applies.

The application of regulations 302-195 and 302-195A of the ITAR 1997 is supported by the Tax Laws Amendment (2007 Measures No. 3) Act 2007Explanatory Memorandum which explains the circumstances that constitute an individual being killed in the line of duty and states:

4.15 Circumstances that constitute an individual being killed in the line of duty will be set out in regulations. The circumstances of the death must be covered in the regulations in order for the deceased's non-dependant beneficiaries to qualify for the same tax treatment as a dependant. [Schedule 4, item 2, subsection 302-195(3)]

4.16 It is intended that the regulations will cover circumstances that are both included and excluded from the definition of 'died in the line of duty'. Excluded circumstances, such as suicide, would override included circumstances, such as participation in an overseas deployment. The intended application will be covered in more detail in the explanatory statement to the regulations.

In this case, the coroner's report states the direct cause of death was found to be a specific injury. The Antecedent cause was seen to be morbid conditions if any giving rise to the above cause. The report summary states the deceased was participating in an army exercise when they incurred their injury. As such, the Deceased died as a result of an injury sustained during the performance of their training duties in accordance with subregulation 302-195(4) of the ITAR 1997.

Therefore, the Deceased died in line of duty for the purposes of subsection 302-195(2) of the ITAA 1997.

Accordingly, as per subsection 302-195(2) of the ITAA 1997 the beneficiaries who receive a superannuation lump sum because of the death of the Deceased will be death benefit dependants of the Deceased.

Superannuation death benefits paid to the trustee of a deceased estate

Section 302-10 of the ITAA 1997 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.

As the superannuation lump sum death benefits from the Fund were made to the trustee of the Estate section 302-10 of the ITAA 1997 will apply.

In accordance with subsection 302-10(2) of the ITAA 1997, 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 person or persons otherwise intended to benefit from the deceased estate.

This means that, where a dependant of the deceased receives or will receive part or all of a superannuation death benefit, the lump sum will be subject to tax as if it were paid to a dependant of the deceased, and the death benefit is taken to be income to which no beneficiary is presently entitled.

Similarly, where a person who is not a dependant receives or will receive part or all of a superannuation death benefit, the benefit will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled (subsection 302-10(3) of the ITAA 1997).

Superannuation death benefits will be treated concessionally if dependants of the deceased will benefit from the estate. Where a person receives a superannuation lump sum death benefit and that person was a dependant of the deceased, the benefit is not assessable income and is not exempt income, that is, it is tax-free.

Death Benefits Dependant in relation to the superannuation death benefits

Since the Parents who are receiving the payment satisfy the dependency requirement of subsection 302-195(2) of the ITAA 1997, the death benefit paid to the estate will be taxed in the hands of the Estate in accordance with subsection 302-10(2) of the ITAA 1997. In other words, the portion that is proposed to be paid to the Estate will be tax free in accordance with section 302-60 of the ITAA 1997.

Superannuation lump sum benefit

A lump sum payment of from the ADF Fund to the Estate of the Member will be the payment of a superannuation lump sum benefit. A superannuation lump sum benefit will generally be comprised of:

·        a tax-free component; and

·        a taxablecomponent which may include:

-        an element taxed in the fund; and/or

-        an element untaxed in the fund.

Superannuation funds will calculate these components for each benefit that is paid. The proportioning rule is generally used to calculate the tax free and taxable components of a benefit.

Tax free component of a superannuation interest

The contributions segment of a superannuation interest is defined under subsection 307-220(1) of the ITAA 1997.

(1)   The contributions segment of a superannuation interest is so much of the value of the interest as consists of contributions made after 30 June 2007, to the extent that they have not been and will not be included in the assessable income of the superannuation provider in relation to the superannuation plan in which the interest is held.

As the refund of contributions is not assessable to the ADF Fund in this case, the amount will constitute the contributions segment of the ADF Fund. Section 307-210 of the ITAA 1997 states that the tax free component of a superannuation interest is comprised of the sum of the contributions segment and the crystallised segment. In other words, the amount will be a tax free component of the Member's superannuation interest in the ADF Fund.

The proportioning rule is outlined under subsection 307-125 (2) of the ITAA 1997. According to the rule, when a superannuation lump sum benefit is paid from a superannuation interest, the benefit will include both tax-free and taxable components calculated in the same proportion that these components make up the total value of the superannuation interest.

The Payment is a superannuation lump sum death benefits from the ADF to the trustee of the Estate therefore section 302-10 of the ITAA 1997 will apply.

The documentation from the fund shows that no tax was withheld.

As the parents are determined to be Dependants of the Deceased, the amount is tax free to the parents and therefore the Estate.