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Edited version of private advice
Authorisation Number: 1051667687962
Date of advice: 01 May 2020
Ruling
Subject: PAYG Withholding
Question
In the context of a successor fund transfer, where the transferor fund has incurred premiums for death cover but the transferee fund pays a lump sum death benefit to a non-dependant, does the transferee fund have a PAYG withholding obligation in respect of any untaxed element within the taxable component of the lump sum payment?
Answer
Yes
This ruling applies for the following period
Year ending 30 June 2020
The scheme commences on
1 July 2019
Relevant facts and circumstances
- The Company is a wealth management company which offers solutions across financial advice, investment management, banking, life insurance, superannuation, self-managed superannuation funds, retirement income and investing.
2. During the 2018-19 income year, the Company entered into a Share Sale and Purchase Agreement (the Project).
3. In broad terms, the proposed transaction is to separate the Company's suite of superannuation products between those that will be administered by the Company from those that will be administered by another company post completion of the Project.
4. The above proposed transaction will be achieved via a number of successor fund transfers that will amalgamate a number of superannuation funds.
5. The proposed transaction will result in the transfers of members, underlying assets and life policies from current and existing funds, the transferor funds, to transferee funds, in this instance the transferee fund.
6. Insurance premiums in respect of death cover were paid in the transferor funds in respect of various fund members.
7. During the year of transfer and thereafter lump sum death benefits will be paid to non-dependants for taxation purposes. In circumstances where the transferor fund has incurred premiums for death cover but the transferee fund has not, the transferee fund is seeking to determine whether they have a PAYG withholding obligation in respect of any untaxed element in a lump sum death benefit payment to non-dependants.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 307-290
Taxation Administration Act 1953 Division 12
Taxation Administration Act 1953 Section 12-1
Taxation Administration Act 1953 Section 12-85
Taxation Administration Act 1953 Division 15
Taxation Administration Act 1953 Section 15-10
Reasons for decision
Summary
1. In determining its PAYG withholding obligation in respect of a lump sum death benefit paid to a non-dependant, The transferee fund will need to calculate the taxable component of the lump sum in accordance with section 307-290 of the Income Tax Assessment Act 1997 (ITAA).
Detailed reasoning
2. Whether such a benefit contains an untaxed element depends on section 307-290 of the ITAA applying to the benefit. If it does, any taxed component must be apportioned between its taxed and untaxed elements.
3. Section 307-290 of the ITAA states:
Section 307-290 Taxed and untaxed elements of death benefit superannuation lump sums
(1) This section applies to a * superannuation death benefit that is a *
superannuation lump sum, in relation to which a deduction has been, or is to be,
claimed under section 295-465 or 295-470.
Note 1: Those sections allow deductions for insurance premiums that have been
paid, and for liability for future benefits.
Note 2: Deductions made under former section 279 or 279B of the Income Tax
Assessment Act 1936 are treated for the purposes of this section as having been made
under section 295-465 or 295-470 (see section 307-290 of the Income Tax (Transitional Provisions) Act 1997 ).
(2) The * taxable component of the * superannuation lump sum includes an
element taxed in the fund worked out as follows:
(a) first, work out the amount under the formula in subsection (3);
(b) next, reduce that amount (but not below zero) by the * tax free
component (if any) of the superannuation lump sum.
(3) For the purposes of paragraph (2)(a), the formula is:
|
Amount of |
Service days |
|
*superannuation lump sum X |
Service days + Days to retirement |
where:
"days to retirement" is the number of days from the day on which the deceased died
to the deceased's * last retirement day.
"service days" is the number of days in the * service period for the lump sum.
(4) The element untaxed in the fund of the * taxable component is the balance
of the taxable component.
4. Central to the application of section 302-290 of the ITAA in the current circumstances is the operation of the test in subsection 302-290(1) - whether the superannuation death benefit that is a lump sum is in relation to an insurance premium for which a deduction has been claimed. That is, whether there is a sufficient connection between the insurance policy deductions claimed by the transferor fund and the benefit paid by the transferee fund.
5. It is fundamental to the reasoning in ATO ID 2010/76 on the operation of subsection 302-290(1) of the ITAA, that the life insurance is linked to a member's superannuation interest. In the context of a successor fund transfer, a member's interest moves from the transferor fund to the transferee fund. The insurance remains linked to the member's interest.
6. You have submitted a number of cases analysing the words, 'in relation to', which support an interpretation of the words having wide meaning but there must be a sufficient nexus and a mere remote relationship won't suffice.
7. It is the Commissioner's view that, in the statutory context of the provision, there is a sufficient connection between an insurance deduction of the transferor fund and the corresponding death benefit paid by the transferee fund. The common link is the member's superannuation interest which is connected with both the insurance premium deduction and the payment of the member's death benefit. This ensures that section 302-290 of the ITAA applies in the context of a successor fund transfer.
8. Such an interpretation is confirmed by the Explanatory Memorandum to the Treasury Laws Amendment (2019 Measures No.3) Bill 2019. In discussing the connection between a lump sum death benefit and insurance premium deductions for the purposes of section 307-290 of the ITAA, paragraph 3.195 of the EM states:
Circumstances where there may be a sufficient relationship between the lump sum and the deductions include the cases where the fund that pays the lump sum is either the same fund as the fund that claimed the deductions in relation to the member or is a successor fund to the fund that claimed the deductions for the member.
9. The taxable and untaxed elements of the taxable component are calculated in accordance with the methodology and formula expressed in section 307-290.
10. As the application of section 307-290 of the ITAA is established, it is necessary to consider the transferee's PAYG withholding obligation.
11. Payments made to a person from a superannuation fund may comprise:
· a tax-free component; and
· a taxable component which may include:
- an element taxed in the fund; and/or
- an element untaxed in the fund.
12. Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) sets out payments from which amounts must be withheld. In particular, section 12-85 of Schedule 1 to the TAA states:
An entity must withhold an amount from any of the following payments it makes to an individual:
(a) a *superannuation lump sum;
(b) a payment that is an *employment termination payment or would be one except that it is received more than 12 months after termination of employment.
13. There are exceptions to section 12-85 of Schedule 1 to the TAA which are listed in section 12-1 of Schedule 1.
14. In this case, no exceptions apply under section 12-1 to the lump sum death benefits paid to non-dependants.
15. Division 15 of Schedule 1 to the TAA provides the method to work out the amount to withhold. In particular, section 15-10 states:
The amount that Subdivision 12-B, 12-C or 12-D requires to be withheld from a payment is to be worked out under the withholding schedules made under
section 15-25...
16. Section 12-85 of Schedule 1 to the TAA is within subdivision 12-C and there is a withholding schedule that applies to superannuation lump sums including death benefits. As you mention in your application, the withholding rates are 17% and 32% respectively on the taxed element and the untaxed element.