Edited version of private advice

Authorisation Number: 1052071110462

Date of advice: 21 December 2022

Ruling

Subject: Allocations from a reserve to a deceased member

Question 1

Will the allocation of an amount from a reserve account, which previously supported a pension, be a concessional contribution to the Deceased in accordance with section 291-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Where the Commissioner issues an excess concessional contributions determination, can the executors of the deceased estate elect to release 85% of the excess concessional contribution amount from the Deceased's accumulation interest in the Fund, as per section 131-10 of the Taxation Administration Act 1953 (TAA)?

Answer

Yes.

Question 3

Where the amount remaining in the deceased member's account (after the allocation from the reserve) is paid to the deceased estate, is this to be taxed as a death benefit lump sum payment in accordance with 302-10 of the ITAA 1997, to the extent the amount comprises a taxable component?

Answer

Yes.

Question 4

Will the following be applicable for the trustee of the deceased estate?:

a)    100% of the excess concessional contributions will be included in the estate's assessable income as per section 291-15 of the ITAA 1997.

b)    The estate will be entitled to a 15% tax offset in relation to the excess concessional contributions amount.

c)    The amount of the allocation that is counted as concessional contributions within the Deceased's cap will be subject to 15% Division 293 of the ITAA 1997 tax that will be paid by the estate.

d)    The excess concessional contributions released by the Fund and refunded by the ATO to the deceased estate, will not be subject to additional tax as a death benefit payment.

Answer

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

Relevant facts and circumstances

The Deceased passed away in 2021.

The Deceased was the only member of the Fund.

The Deceased had a number of Flexi Pensions.

The Flexi Pensions were commuted.

As a result of the commutations, a reserve was created in the Fund in accordance with Schedule 1B of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

You have stated that you intend to allocate the full amount in the reserve to the Deceased.

The Deceased's accumulation account benefits have already been cashed as a death benefit lump sum to the deceased estate.

A clause of the Fund's trust deed - Winding up of the fund - provides the following:

'If at any time there are no Members and Beneficiaries then the Fund shall thereupon be wound up by the Trustee transferring the balance of the investments (if any) after allowance for any expenses expected to be incurred in winding up the Fund to the last person who was a Member or to the Dependants or estate of such Member in such proportion as the Trustee may in the absolute discretion of the Trustee determine...'

Relevant legislative provisions

Income Tax Assessment Act 1997 section 291-15

Income Tax Assessment Act 1997 section 291-25

Income Tax Assessment Act 1997 Division 293

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Regulations 1997 regulation 292-25.01

Taxation Administration Act 1953 section 131-10

Income Tax Assessment Act 1936 section 254

Reasons for Decision

Reserve allocations

Amounts held in reserves are available to the trustee to satisfy their obligations under the trust. Reserves may be held for a particular purpose, such as being used solely to pay a defined benefit pension by a self-managed superannuation fund (SMSF), but they do not form part of the entitlement of the superannuation fund member in respect of that pension.

The trustee of a superannuation fund is required to adhere to the terms of the fund's trust deed, as well as obligations imposed by the Superannuation Industry (Supervision) Act 1993 (SISA) and the SISR. Where the fund's trust deed permits the use of reserves, it will most likely also contain provisions on how the reserve is to be treated, who it can be allocated to and what must be done with any amounts left in the reserve when the fund is wound up. The trustee must exercise their powers and extinguish their duties and obligations in accordance with these requirements, noting that trust deeds may vary from case to case.

SMSF trust deeds may potentially contain scope for trustees to have discretion about how amounts from reserves can be allocated, and who they can be allocated to, particularly when the fund is being wound up. While pension reserves may have stricter requirements, as they are used solely for paying the pension, that matter does not alter the position that they do not form the entitlement of the member who is receiving the pension. For instance, in the case of the Flexi Pensions that were paid to the Deceased, he was entitled to be paid ongoing pension payments (which could have been funded from the reserve). However, the Deceased did not otherwise have an entitlement to the amounts in the reserve supporting the pension.

Given these matters, it would not be appropriate to assume a default position requiring the amounts in a reserve to be allocated to the Deceased member's account without regard to the Fund's trust deed. Where the deed does support that action, then such amounts would not form part of the entitlement of the deceased member until they are so allocated.

In this case, with regard to the wind up of the Fund, the trust deed allows (at the discretion of the trustee) the balance of the Fund's investments (if any) to be allocated to the last person who was a member, or to the dependants or estate of the last member. The allocation would not contravene the SISA/SISR, subsequently, the Commissioner should not take a position that would conflict with the Fund's deed on this matter.

Concessional contributions

Subsection 291-25 of the ITAA 1997 provides that a person's concessional contributions for a financial year is the sum of each contribution covered under subsection 291-25(2), and each amount covered under subsection 291-25(3).

Subsection 291-25(3) of the ITAA 1997 states that an amount in a complying superannuation plan is covered under that subsection if it is allocated by the superannuation provider in relation to the plan for the individual in accordance with the conditions specified in the regulations.

Regulation 292-25.01 of the Income Tax Assessment Regulations 1997 (ITAR) sets out the conditions for the purpose of allocating an amount in a complying superannuation plan for subsection 291-25(3) of the ITAA 1997.

Regulation 291-25.01 of the ITAR provides that an amount is included in a person's concessional contributions for a financial year if it is allocated from a reserve maintained by the trustee unless it meets one of the exceptions in subregulations 291-25.01(4) and (5).

Relevantly, an amount is excluded from being a concessional contribution under subregulations 291-25.01(4) and (5) in the following circumstances:

Subregulation 291-25.01(4)

The amount is allocated in a fair and reasonable manner

•         to an account for every member of the fund, or

•         if the member is a member of a class of members and the reserve only relates to that class of members - to an account for every member of that class, and

•         the amount allocated for the financial year is less than 5% of the member's superannuation interest in the fund at that time, and

•         the amount would not be assessable income of the fund if it were made as a contribution.

Subregulation 291-25.01(5)

The amount is allocated from a reserve used solely for the purpose of enabling the fund to discharge all or part of its liabilities (contingent or not), as soon as they become due and payable in respect of a superannuation income stream that are payable by the fund at the time, and any of the following applies:

•         the amount has been allocated to satisfy a pension liability of the plan paid during the financial year;

•         on commutation of the income stream, except as a result of death of the primary beneficiary, the amount is allocated to the recipients to commence another income stream as soon as practicable; or

•         as soon as practicable after the commutation of an income stream, as the result of the death of the primary beneficiary, the amount:

o   is allocated to a death benefit dependant to discharge liabilities in respect of a superannuation income stream that is payable by the plan as a result of the death; or

o   is paid as a superannuation lump sum that is a superannuation death benefit.

Based on the above, an allocation from a reserve exceeding 5% of the Deceased member's interest will be a concessional contribution to the member.

Deceased estate

A deceased estate is not a person but simply a collection of rights and obligations of the deceased person administered by an executor. A deceased estate refers to all of the property, assets, liabilities and debts belonging to the person when they died. The deceased estate holds the assets of the deceased in trust from the time of the death of the person concerned until the transfer of the property and assets to their beneficiaries.

Any tax liabilities of the Deceased will be the responsibility of the legal personal representative for the deceased estate as per section 254 of the Income Tax Assessment Act 1936 (ITAA 1936).

Excess concessional contributions

An individual's concessional contributions cap is $27,500 for the 2023 income year.

Exceeding the cap means that:

• the excess concessional contributions amount is included in the individual's assessable income as per section 291-15 of the ITAA 1997
• this amount will be taxed at their marginal tax rate.

The individual is entitled to a 15% tax offset for the contributions tax already paid by their superannuation fund.

If the individual exceeds their concessional contributions caps, they may elect to withdraw up to 85% of their excess concessional contributions from their fund to help pay the income tax liability in accordance with section 131-10 of the TAA.

Where the Deceased has excess concessional contributions, we will send the legal personal representative a determination and a notice of assessment.

The excess concessional contributions are included in assessable income of the deceased estate, with the application of a 15% tax offset.

On receiving the determination from the ATO, the legal personal representative can elect to withdraw up to 85% of the excess concessional contributions from the Fund to help pay the income tax liability. The legal personal representative has 60 days to make an election.

Once the election is made, the ATO will issue the Fund with a release authority. The Fund will have 10 business days to release the requested amount and send it to the ATO. This will be used to pay any outstanding tax liability and other Government debts of the Deceased.

The remaining balance will be refunded to the deceased estate. This amount is not a death benefit payment as it is not a payment from a superannuation fund upon the death of a member. The benefits were released to the Commissioner in accordance with the release authority requirements of item 111A of Schedule 1 of the SISR, and not as a death benefit payment.

Any amounts remaining in the Deceased member's accumulation account will be subject to the compulsory cashing requirements and will be classed as a death benefit payment to the relevant beneficiary(s) to be taxed in accordance with 302-10 of the ITAA 1997, to the extent the amount comprises a taxable component.

Division 293 and excess concessional contributions

In accordance with Division 293 of the ITAA 1997, 15% tax is payable by an individual on their taxable contributions where their combined adjustable taxable income and concessionally taxed superannuation contributions exceed $250,000 for an income year.

Where the income threshold is exceeded, the individual's taxable contributions is the lesser of:

•         the amount of the low tax (concessional) contributions, and

•         the amount exceeding the threshold amount.

Section 293-25 of the ITAA 1997 specifically excludes an individual's excess concessional contributions from the low tax contribution amount.

Excess concessional contributions are taxed in other ways so the individual is no longer receiving a concession for them. As a result, Division 293 superannuation contributions are generally equal to concessional contributions minus excess concessional contributions.

In this case, the Deceased's income threshold will be exceeded. As a result, 15% tax is applicable to the Deceased's total concessional contributions less the excess concessional contribution amount.

For Division 293 tax the ATO will send a notice of assessment to the legal personal representative once we receive both the Deceased's income and contribution information.

Death benefits

Section 307-5 of the ITAA 1997 includes in the definition of a superannuation benefit a payment to a taxpayer from a superannuation fund, after another person's death, because the other person was a member of the fund.

Subregulation 6.21(1) of SISR provides that an SMSF member's benefits must be cashed 'as soon as practicable' after the death of the member.

Regulation 6.22 of the SISR provides that the superannuation benefits of a deceased member must be paid to one or more dependants and/or a legal personal representative of the deceased member. If neither of these can be found after making reasonable enquiries, the benefits can be paid to another individual.

When superannuation death benefits are paid directly by the fund trustee to a beneficiary who is not a death benefits dependant, the trustee of the fund will be responsible for calculating and deducting from the payment any superannuation death benefits tax. When superannuation death benefits are paid to the legal personal representative (executor or administrator of the deceased estate), the fund trustee does not deduct any tax but provides the legal personal representative with a statement setting out the taxable components of the payment.

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 otherwise intended to benefit from the estate.

Subsequently, it is the responsibility of the legal personal representative to pay any superannuation death benefits tax from the deceased estate before it is distributed. Where death benefits are paid by the estate to a 'death benefits dependant', no tax will be payable. If, however, any part of the superannuation death benefit is payable under the will or on intestacy to a beneficiary who does not fall within that definition, the legal personal representative will be responsible for declaring and paying tax on the taxable component of the death benefit.