Edited version of private advice

Authorisation Number: 1052043368052

NOTICE

The private ruling on which this edited version is based has been overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 25 October 2022

Ruling

Subject: Superannuation death benefit - interdependency

Question 1:

Will the payment of the superannuation death benefit of the Deceased to the Trustee of his Deceased Estate be treated as if it had been paid to a death benefits dependant under subsection 302-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances:

The Deceased and their spouse (the Deceased's spouse) were members of a self-managed superannuation fund (the Fund).

The Deceased died in late 20YY.

The last Will and Testament of the Deceased was executed in early 20YY. Clause 4 of their will provides that their whole estate be given to the Deceased's spouse if they survive the Deceased by 30 days.

The Deceased's spouse died in mid-20YY.

The last Will and Testament of the Deceased's spouse was executed in early 20YY. Clause 4 of their will provides that their whole estate be given to the Deceased. Clause 5 provides that, if the Deceased failed to survive the Deceased's spouse for thirty days, their whole estate will be held upon trust for their children.

The Deceased's spouse's children (the final beneficiaries) are not death benefit dependants.

The superannuation death benefit was paid by the Trustee of the Fund to the Trustee of the Deceased Estate in mid-20YY.

This above sum has been receipted into the Deceased's lawyer's trust account for the Deceased Estate.

As the Deceased's spouse survived the Deceased by 30 days, all distributions from the Deceased Estate are payable to the Deceased's spouse's Estate, including the superannuation death benefit.

Relevant legislative provisions:

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 subsection 302-10(2)

Income Tax Assessment Act 1997 section 302-10(3)

Income Tax Assessment Act 1997 section 302-145

Income Tax Assessment Act 1997 section 302-195

Income Tax Assessment Act 1997 subsection 302-195(1)

Income Tax Assessment Act 1997 section 995-1

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

Reasons for decision:

Summary:

The Deceased's spouse did not benefit, nor could they be expected to benefit, from the Deceased's superannuation death benefit, as the Deceased's spouse had already passed away.

Therefore, the benefit would be treated as though it had been paid to a person who was not a death benefits dependant under subsection 302-10(3) of the ITAA 1997.

Detailed reasoning

Meaning of death benefits dependant

Subsection 995-1(1) of the ITAA 1997 states that the term 'death benefits dependant' has the meaning given by section 302-195 of the ITAA 1997. Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant as follows:

A death benefits dependant, of a person who has died, is

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.

The Deceased's spouse, as the spouse of the Deceased, was a death benefit dependant under paragraph 302-195(1)(a) of the ITAA 1997 at the time of the Deceased's death.

Tax treatment where superannuation death benefit paid to trustee of deceased estate

The superannuation death benefit was paid to the Trustee of the Deceased Estate.

The tax treatment of superannuation death benefit payments in the hands of the trustee of a deceased estate is outlined in section 302-10 of the ITAA 1997:

(1) 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.

(2) To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

(3) To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit:

(a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and

(b) the benefit is taken to be income to which no beneficiary is presently entitled.

Although the Deceased's spouse was a death benefits dependant, the concessional tax treatment afforded by subsection 302-10(2) of the ITAA 1997 is reliant upon the superannuation death benefit being received or expected to be received by a death benefit dependant.

Ordinarily, the requirement to ascertain whether a death benefit dependant may be expected to benefit from a superannuation death benefit arises when the trustee of the estate is required to lodge an income tax return for the estate after the superannuation benefit has been received by the estate but before the assets can be distributed to the beneficiaries. The provision allows the trustee to make a determination that the death benefit will be tax free to the extent that a death benefit beneficiary will receive it once the estate assets can be distributed.

To determine whether the concessional tax treatment under subsection 302-10(2) of the ITAA 1997 will apply to the Deceased's superannuation death benefit as paid into the Deceased's spouse's estate, there must be an expectation that a death benefit dependant will benefit from the superannuation death benefit. This requires that we adopt a look-through approach to consider relevant factors including, who are the potential beneficiaries of the estate and when the beneficiary will receive the death benefit.

Subsection 302-10(2) of the ITAA 1997 refers to death benefit dependants who 'have benefited, or may be expected to benefit, from the superannuation death benefit'. The use of the phrase 'may be expected to benefit' connotes something that is less than absolute certainty. The death benefit dependant in question does not have to have already benefited from the death benefit, it is enough that they can reasonably be expected to benefit.

At paragraph 4.23 of the request for a private ruling, the lawyer contended that the meaning of the phrase 'may be expected to benefit' would mean that an expectation of a benefit would be sufficient, and that the Deceased's spouse had satisfied the phrase 'have benefited, or may be expected to benefit' as they were the sole beneficiary of the Deceased's superannuation death benefit, and said benefit would increase their estate.

However, for subsection 302-10(2) of the ITAA 1997, to apply, there needs to be a reasonable expectation that the superannuation death benefit will be received by a death benefits dependant.

Additionally, although death benefits dependancy is assessed at the time of the deceased's death, this is not necessarily applicable to the determination of who has benefited or is expected to benefit from a superannuation death benefit.

In this case, it would be reasonable to conclude that the Deceased's spouse has not benefited, nor can they be expected to benefit, from the superannuation death benefit of the Deceased, as the Deceased's spouse passed away before it was paid.

Conclusion

Although the Deceased's spouse was a death benefits dependant of the Deceased at the time of their death, the Deceased's spouse has not benefitted nor are they expected to benefit from the superannuation death benefit, as the Deceased's spouse had already passed away.

The final beneficiaries of the Deceased's superannuation death benefit are not death benefits dependants.

Thus, the applicable provision to determine the tax treatment of the superannuation death benefit is subsection 302-10(3) of the ITAA 1997.