Edited version of private advice

Authorisation Number: 1051624912400

Date of advice: 16 January 2020

Ruling

Subject: Superannuation death benefit

Question

Will the superannuation death benefit, paid to the Estate Trustee under a binding death nomination and subsequently bequeathed to a deductible gift recipient, be taxable?

Answer

Yes.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

The Deceased passed away in the 20XX-XX income year.

The Deceased was a member of an Australian superannuation fund (the Fund).

The Executor is the Executor of the Deceased's will and the trustee of her estate.

The Deceased's will provides:

·         an amount be provided to two of her friends,

·         an amount and her motor vehicle be provided to another individual,

·         the remainder of her estate be bequeathed to the Charity.

None of the beneficiaries are death benefits dependants of the Deceased.

The Charity is a deductible gift recipient under Subdivision 30-BA of the Income Tax Assessment Act 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 30-BA

Income Tax Assessment Act 1997 Section 302-10

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

Income Tax Assessment Act 1997 Subsection 302-145(3)

Income Tax Assessment Act 1997 Subsection 307-5(1)

Income Tax Assessment Act 1997 Subsection 307-5(4)

Reasons for decision

Summary

The Trustee of the deceased estate is taxed on the taxable component of the superannuation death benefit.

The Trustee will pay tax on the part of the benefit which is ultimately attributable to the non-dependant beneficiaries. Therefore, in the income tax return lodged by the Trustee of the Deceased's Estate, the amount of the superannuation death benefit that should be included as assessable income is the portion of the taxable component of the benefit which is attributable to the non-dependants of the Deceased intended to benefit from the estate.

Detailed reasoning

Superannuation death benefit provisions

A superannuation death benefit is defined in subsection 307-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) as a payment described in column 3 of the table in subsection 307-5(1) of the ITAA 1997.

Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 describes a superannuation death benefit as:

... A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.

Further a superannuation death benefit must be paid as either:

·         a superannuation lump sum; or

·         a superannuation income stream.

In this case, the Deceased, who died in 2018-19, was a member of the Fund.

Subsequent to the Deceased's death, her benefits in the Fund were paid to her Estate.

In view of the above, the payment is a superannuation death benefit as defined in column 3 of Item 1 of the table in subsection 307-5(1) and consequently a superannuation death benefit under subsection 307-5(4) of the ITAA 1997.

As the benefit was made by the Fund the relevant provisions of Division 302 of the ITAA 1997 require examination to determine its tax treatment.

Application of Subdivision 302-A of the ITAA 1997

As previously mentioned, the benefit in this case was made to the Estate of the Deceased and accordingly section 302-10 of the ITAA 1997 applies.

Under section 302-10 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 intended to benefit from the estate.

This means a superannuation death benefit paid to the trustee of an estate is taxed in the hands of the trustee in the same way it would be taxed if paid directly to the beneficiary. That is, portions of the death benefit payment are subject to tax to the extent that the beneficiaries are dependants or non-dependants of the deceased.

The taxation treatment of the superannuation death benefit paid to the Estate

In this case the facts show that the some of the superannuation death benefit made to the Estate of the Deceased will ultimately be distributed to the Charity, which is a non-dependant beneficiary.

As previously stated, the tax treatment of a superannuation death benefit paid directly to the trustee of a deceased estate is taxed in the same way it would have been taxed if the benefit was paid directly to a dependant or non-dependant beneficiary. Therefore it follows that distributions of a superannuation death benefit when ultimately made to beneficiaries should reflect their proportionate share of the components which comprise the superannuation death benefit, in this case, a taxable component (comprising taxed and untaxed elements) and a tax-free component.

Gift made under the will

It is noted that in the Deceased's will that a testamentary gift is to be made to the Charity. The gift to the Charity, which results in the Charity being one of the beneficiaries, is a proportional distribution of the residue of the deceased's real and personal estate which accordingly includes the superannuation death benefit.

As the Charity was not a death benefits dependant of the deceased, the trustee of the Deceased's Estate is liable for tax on the amount of the superannuation death benefit which is distributed to the Charity to the extent of the Charity's share of the death benefit's taxable component.

Conclusion

The income tax return lodged by the Trustee of the Deceased's Estate for the 20XX-XX income year should include as assessable income the portion of the taxable component of the superannuation death benefit which is attributable to the non-dependants.

In accordance with subsections 302-145(2) and 302-145(3) of the ITAA 1997 the taxed and untaxed elements of the taxable component, attributable to the non-dependants, is taxed at a rate not exceeding 15% and 30% respectively.