Edited version of private advice

Authorisation Number: 1052090528673

Date of advice: 10 March 2023

Ruling

Subject:Superannuation lump sum benefit

Question 1

Are the three benefits from a partial commutation of X's pension phase account requested before their death on X XXX 20XX, but received after X's death, being amounts of $A each on X XXX 20XX, X XXX 20XX and X XXX 20XX superannuation income stream benefits or superannuation lump sum benefits?

Answer

Each of the three benefits of $A are superannuation lump sum benefits.

Question 2

Is the amount of $B paid from X's accumulation phase account requested before their death, but received after their death, on X XXX 20XX, a superannuation income stream benefit or a superannuation lump sum benefit?

Answer

The benefit is a superannuation lump sum benefit.

Question 3

Is the pension payment of $C received on X XXX 20XX from X's pension phase account, a superannuation income stream benefit or a superannuation lump sum benefit?

Answer

The benefit is a superannuation lump sum benefit.

Question 4

Are the amounts of $D received on X XXX 20XX, $E received on X XXX 20XX and $F received on X XXX 20XX, from the X's accumulation account, superannuation income stream benefits or superannuation lump sum benefits?

Answer

The benefits are superannuation lump sum benefits.

Question 5

Are the three benefits from a partial commutation of X's pension phase account requested before their death on X XXX 20XX, but received after X's death, being amounts of $A each on X XXX 20XX, X XXX 20XX and X XXX 20XX superannuation member benefits or superannuation death benefits?

Answer

Each of the three benefits of $A are superannuation member benefits and should be taxed under Division 301 of the Income Tax Assessment Act 1997 (ITAA 1997).

Question 6

Is the amount of $B paid from X's accumulation phase account requested before their death, but received after their death, on X XXX 20XX a superannuation member benefit or superannuation death benefit?

Answer

The benefit is a superannuation member benefit and should be taxed under Division 301 of the ITAA 1997.

Question 7

Is the pension payment of $C received on X XXX 20XX from X's pension phase account, a superannuation member benefit or a superannuation death benefit?

Answer

The benefit is a superannuation member benefit and should be taxed under Division 301 of the ITAA 1997.

Question 8

Are the amounts of $D received on X XXX 20XX, $E received on X XXX 20XX and $F received on X XXX 20XX from X's accumulation account, superannuation member benefits or superannuation death benefits?

Answer

The benefits are superannuation death benefits and should be taxed under Division 302 of the ITAA 1997.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Member, X (the Member), was born on X XXX 19XX and was X years old at the date of their death.

The Member held 2 superannuation accounts with their superannuation fund, X, which is an APRA regulated fund:

The pension amount set for the 20XX-XX financial year was $C per month.

The Member did not have any death benefits dependants for the purposes of the ITAA 1997.

During 20XX financial year the Member met with their financial planner multiple times and received advice on (amongst other topics) withdrawing large amounts from their superannuation accounts.

On X XXX 20XX the Member signed an authority for their financial planner to proceed with:

•         Commuting $G from their pension phase account

•         Withdrawing the entire balance of approximately $H from their accumulation phase account and closing the account.

On X XXX 20XX, the Member signed the necessary withdrawal and superannuation account closure form for the accumulation phase account and the authority to commute document for the pension phase account.

The Member's financial adviser commenced trading and selling down the investments held by the superannuation accounts on X XXX 20XX.

On X XXX 20XX, the Member's financial adviser confirmed the trading and selling down of investments was complete.

Although the Member commuted $G from their pension phase account, their superannuation fund had restricted the maximum amount of the withdrawals to $A per day. Accordingly, the Member received 2 payments of $A each, one on X XXX 20XX and one on X XXX 20XX, from their pension phase account to their personal bank account.

The Member passed away on X XXX 20XX.

The Member's personal bank account subsequently received 3 payments of $A each on X XXX 20XX, X XXX 20XX and X XXX 20XX from his pension phase account.

The Member's death certificate was issued on X XXX 20XX. The Member's financial planner notified the Member's superannuation fund of the Member's death on or around X XXX 20XX or X XXX 20XX after receiving a copy of this certificate.

On X XXX 20XX, a 'pension payment' of $C was made from the Member's pension phase account to their personal bank account.

Also on X XXX 20XX, an amount of $B was paid from the Member's accumulation phase account to their personal bank account.

Probate was granted on X XXX 20XX.

The Member's personal bank accounts were converted to estate bank accounts on or around X XXX 20XX.

The Member's estate bank account subsequently received three additional payments from the Member's accumulation phase account:

•         $D received on X XXX 20XX

•         $E received on X XXX 20XX

•         $F received on X XXX 20XX.

Relevant legislative provisions

Division 301 of the Income Tax Assessment Act 1997

Division 302 of the Income Tax Assessment Act 1997

Section 307-5 of the Income Tax Assessment Act 1997

Section 307-65 of the Income Tax Assessment Act 1997

Section 307-70 of the Income Tax Assessment Act 1997

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

Regulation 307-70.01 of the Income Tax Assessment (1997 Act) Regulations 2021

Regulation 307-70.02 of the Income Tax Assessment (1997 Act) Regulations 2021

Regulation 1.06 of the Superannuation Industry (Supervision) Regulations 1994

Regulation 6.12 of the Superannuation Industry (Supervision) Regulations 1994

Regulation 6.20 of the Superannuation Industry (Supervision) Regulations 1994

Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994

Schedule 1 to the Table in Part 1 of the Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

Income stream benefit or lump sum benefit

Legislative framework

Subsection 995-1(1) of the ITAA 1997 defines 'superannuation benefit' as having the meaning given by section 307-5.

Section 307-5 of the ITAA 1997 states:

307-5(1) A superannuation benefit is a payment described in the table.

(Table truncated)

307-5(2) A superannuation member benefit is a payment described in column 2 of the table.

[...]

307-5(4) A superannuation death benefit is a payment described in column 3 of the table.

Section 307-70 of the ITAA 1997 defines 'superannuation income stream benefit' and 'superannuation income stream':

307-70(1) A superannuation income stream benefit is a superannuation benefit specified in the regulations that is paid from a superannuation income stream.

307-70(2) A superannuation income stream has the meaning given by the regulations.

There are thus two limbs that must be met for a superannuation benefit to be a superannuation income stream benefit:

(a)  The superannuation benefit is specified in the Regulations; and

(b)  The superannuation benefit is paid from a 'superannuation income stream' (which is also defined in the Regulations).

For the purposes of subsection 307-70(1) (a superannuation benefit specified in the Regulations), regulation 307-70.01 of the Income Tax Assessment (1997 Act) Regulations 2021 (ITAR 2021) states that all superannuation benefits are specified.

For the purposes of subsection 307-70(2) (the definition of superannuation income stream), regulation 307-70.02 of the ITAR 2021 states:

307-70.02(1) For the purposes of subsection 307-70(2) of the Act, a superannuation income stream is:

(a) an income stream that is taken to be:

(i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations; or

(ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations; or

(iii) a pension for the purposes of the RSA Act in accordance with regulation 1.07 of the RSA Regulations; or

(b) an income stream that:

(i) is an annuity or pension within the meaning of the SIS Act; and

(ii) commenced before 20 September 2007; or

(c) a deferred superannuation income stream that is taken to be:

(i) an annuity for the purposes of the SIS Act in accordance with subregulation 1.05(1) of the SIS Regulations because the contract for the provision of the income stream meets the standards of subregulation 1.06A(2) of the SIS Regulations; or

(ii) a pension for the purposes of the SIS Act in accordance with subregulation 1.06(1) of the SIS Regulations because the rules for the provision of the income stream meet the standards of subregulation 1.06A(2) of the SIS Regulations; or

(d) for the purposes of sections 295-38, 295-390, 295-395, 320-246 and 320-247 of the Act - one or more rights (whether contingent or not), to the extent that they are covered by subsection (3).

Broadly, subregulation 1.06(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) states that a benefit is taken to be a pension for the purposes of the Superannuation Industry (Supervision) Act 1993 (SISA) if it is provided under rules of a superannuation fund that meets the standards of subregulation 1.06(9A) or 1.06A(2) and does not permit the capital supporting the pension to be added to once the pension has commenced.

If a superannuation benefit does not satisfy the definition of a superannuation income stream benefit, section 307-65 of the ITAA 1997 also states:

307-65(1) A superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit (see section 307-70).

307-65(2) Treat a lump sum payment arising from a partial commutation of a superannuation income stream as a superannuation lump sum for the purposes of this Act (other than Subdivision 295-F).

Three $A payments from pension phase account received X XXX 20XX, X XXX 20XX and X XXX 20XX

The Member was receiving pension payments from X Fund. As we have not been provided with any contrary information, we assume that these pension payments would satisfy the 2 limbs; namely, that the payment would meet the definition of a superannuation benefit under regulation 307-70.01 of the ITAR 2021 and is paid from a superannuation income stream as defined in regulation 307-70.02 of the ITAR 2021.

The 3 $A payments made to the Member's personal bank account received from their pension phase account on X XXX 20XX, X XXX 20XX and X XXX 20XX were payments arising from the partial commutation of the Member's pension phase account. The income stream was not intended to cease after the payment; the Member simply commuted a portion of their entitlement to future superannuation income stream benefits for an entitlement to a lump sum.

Subsection 307-65(2) of the ITAA 1997 confirms that a lump sum payment arising from a partial commutation of a superannuation income stream is a superannuation lump sum for ITAA 1997 purposes. As the 3 $A payments meet the requirements of subsection 307-65(2) of the ITAA 1997, they should be treated as superannuation lump sum benefits for ITAA 1997 purposes.

Although former paragraph 995-1.03(b) of the Income Tax Assessment Regulations 1997 (Repealed) allowed a member to elect that a payment of a partial commutation not be treated as a superannuation income stream benefit but a lump sum benefit instead, this provision was repealed for payments made on or after 1 July 2017 and was not re-enacted in the ITAR 2021.

Payment of $B received on X XXX 20XX

The benefit of $B paid from the Member's accumulation phase account requested before the Member's death, but received on X XXX 20XX after their death, is a superannuation lump sum benefit. This is a straightforward application of subsection 307-65(1) of the ITAA 1997.

Payment of $C received on X XXX 20XX

Taxation Ruling TR 2013/5 Income tax: when a superannuation income stream commences and ceases (TR 2013/5) states (at paragraph 27) that a superannuation income stream does not cease when a member partially commutes that income stream. The Member would have still been entitled to receive their superannuation income stream from their pension phase account following the partial commutation of $A.

However, TR 2013/5 also states (at paragraph 14) that a superannuation income stream ceases when there is no longer a member who is entitled (or a dependant beneficiary of a member who is automatically entitled) to be paid a superannuation income stream benefit. Paragraph 29 confirms that a superannuation income stream ceases as soon as the member in receipt of the income stream dies (unless a dependant beneficiary of the deceased member is automatically entitled to receive the income stream upon the member's death).

The superannuation income stream that the Member received from their pension phase account ceased on the date of the Member's death X XXX 20XX, as there was no dependant beneficiary who was automatically entitled to receive the income stream.

This means that the superannuation benefit of $C paid from the Member's pension phase account to their personal bank account on X XXX 20XX did not meet the definition of a superannuation income stream benefit in subsection 307-70(1) of the ITAA 1997 as it was not paid from a superannuation income stream.

Paragraph 8 of TR 2013/5 states that where a payment is made from a superannuation interest that has ceased to support a superannuation income stream, the benefit is a superannuation lump sum benefit.

If a superannuation benefit does not satisfy the definition of a superannuation income stream benefit, subsection 307-65(1) of the ITAA 1997 applies and the payment is a superannuation lump sum for ITAA 1997 purposes. Accordingly, the amount of $C is a superannuation lump sum benefit.

Payments of $D, $E and $F received on X XXX 20XX, X XXX 20XX and X XXX 20XX respectively

The amounts of $D paid on X XXX 20XX, $E paid on X XXX 20XX and $F paid on X XXX 20XX from the Member's accumulation phase account are also superannuation lump sum benefits under subsection 307-65(1). This is because these payments do not meet the definition of superannuation income stream benefits in section 307-70 of the ITAA 1997.

Member benefit or death benefit

Legislative framework - Release of benefits

The member was born on X XXX 19XX and was XX years old at the date of their death on X XXX 20XX. This meant that the member had already satisfied the condition of release in Schedule 1, item 106 of the table in Part 1 of the SISR by reaching the age of 65 years. This condition of release has 'nil' cashing restrictions. Under regulation 6.12 of the SISR, the member's benefits were all converted to unrestricted non-preserved benefits upon meeting a condition of release with 'nil' cashing restrictions. Under subregulation 6.20(1) of the SISR, a member's unrestricted non-preserved benefits in a regulated superannuation fund may be voluntarily cashed at any time. As per subregulations 6.20(2) and (3) of the SISR the whole or a part of the member's unrestricted non-preserved benefits may be cashed as one or more lump sums or one or more pensions.

The member's death on X XXX 20XX then resulted in their meeting the condition of release in Schedule 1, item 102 of the table in Part 1 of the SISR. This condition of release also has 'nil' cashing restrictions. Under subregulation 6.21(1) of the SISR, a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies. Paragraph 6.21(2)(a) dictates that benefits must be cashed as single lump sums for non-dependants. Only dependants (for SISR purposes) may cash benefits in the form of a superannuation income stream in the retirement phase, as per paragraph 6.21(2)(b) and subregulation 6.21(2A) of the SISR.

Legislative framework - taxation of benefits

Item 1, column 2 of the table in subsection 307-5(1) and subsection 307-5(2) of the ITAA 1997 state that a superannuation member benefit is a payment to a person from a superannuation fund because the person is a fund member. Item 1, column 3 of the table in subsection 307-5(1) and subsection 307-5(4) ITAA 1997 state that a superannuation death benefit is a payment to a person from a superannuation fund after another person's death because the other person was a fund member.

The distinction between a superannuation member benefit and a superannuation death benefit is important because the tax treatment of the superannuation benefit varies according to its classification (as well as the age of the recipient and the components of the benefit).

The tax treatment of superannuation member benefits is set out in Division 301 of the ITAA 1997. Broadly, section 301-10 states that if a member is 60 years or over when they receive a superannuation benefit, the benefit is non-assessable and non-exempt income. This applies whether the superannuation benefit is a lump sum or an income stream benefit. (If the taxable component of the benefit has an element untaxed in the fund, the untaxed element is assessable income and either section 301-95 or 301-100 will apply depending on whether the benefit is a lump sum or an income stream benefit.)

The tax treatment of superannuation death benefits is set out in Division 302 of the ITAA 1997. Subdivision 302-B applies where the recipient is a death benefits dependant of the deceased, and Subdivision 302-C applies where the recipient is not a death benefits dependant of the deceased. As the Member did not have any death benefits dependants, Subdivision 302-B will not be discussed further.

Regarding a superannuation lump sum that a person receives because of the death of another person of whom they are not a death benefits dependant:

•         Section 302-140 states that the tax-free component is non-assessable and non-exempt income;

•         Subsection 302-145(1) states that the taxable component is assessable income. However, subsection 302-145(2) entitles the recipient to a tax offset to ensure the rate of tax on the element taxed in the fund does not exceed 15%, and subsection 302-145(3) entitles the recipient to a tax offset to ensure the rate of tax on the element untaxed in the fund does not exceed 30%.

Death benefit or member benefit

An amount that a member requested to be paid from their superannuation fund before their death, but was paid after their death, may be classified as a member benefit instead of a death benefit depending on the facts and circumstances of the payment.

A trustee of a regulated superannuation fund can only pay superannuation benefits according to the fund's governing rules, including the fund's trust deed and relevant legislation. These governing rules set out when benefits can be paid and who they can be paid to, including after a member's death. A superannuation fund's governing rules must be read carefully to determine a member's benefit entitlements in the event of death.

The assessment of whether the amount that the member requested to be paid is a member benefit or a death benefit is based on the facts known at the time of the payment, including:

•         The terms of the member's request;

•         The terms of the trust deed and any other governing rules;

•         The fund trustee's knowledge at the time that the payment is made (including whether they are aware that the member has died);

•         The entity that the payment is being paid to;

•         The circumstances and timing of the payment; and

•         Whether the payment is made because of and consistent with the member's request.

Three $A payments from pension phase account received X XXX 20XX, X XXX 20XX and X XXX 20XX

The three $A payments that the Member's personal bank account received from their pension phase account immediately after their death on X XXX 20XX, X XXX 20XX and X XXX 20XX resulted from the partial commutation of the Member's pension phase account, being the final three instalments of five payments totalling $G.

The Member's superannuation fund limited its withdrawals to a maximum of $A per day. It was this restriction alone that necessitated the $G commutation being split into 5 equal payments made over 5 business days. Otherwise it can be presumed that the entire $G would have been commuted from the Member's pension phase account in one transaction and received in the Member's personal bank account before their death.

At the time of each of the 3 $A payments, the fund trustee was not aware that the Member had passed away. The trustee processed the 3 $A payments consistent with the cashing rules in regulation 6.20 of the SISR on the basis that the Member was still alive. In fact, the superannuation fund was not informed of the Member's death until X XXX 20XX or X XXX 20XX - a few weeks after the payment of the final benefit.

The 3 $A payments were paid to the Member's personal bank account in accordance with their instructions made prior to their death and with the expectation they would be alive to personally receive them. The payments were not made to the Member's legal personal representative or their estate - although they were made immediately after the date of death, the timing of the payments was well before the trustee could be reasonably expected to have knowledge of the Member's death.

Accordingly, the 3 payments of $A received on X XXX 20XX, X XXX 20XX and X XXX 20XX from the Member's pension phase account should be treated as superannuation member benefits and taxed under Division 301 of the ITAA 1997.

Payment of $B received on X XXX 20XX

On X XXX 20XX, an amount of $B was paid from the Member's accumulation phase account to their personal bank account.

Before their death, the Member planned to withdraw their entire accumulation phase account balance and then close the account. They initiated this plan on X XXX 20XX when they signed the authority to proceed, withdrawal and account closure forms. The Member's financial adviser commenced trading and selling down the investments within the accumulation account on X XXX 20XX, and most of these sales were complete by X XXX 20XX (also before the Member's death).

The payment was made because of and consistent with the Member's request. The trustee of the Member's superannuation fund appears to have processed the $B lump sum withdrawal in good faith, and consistent with the cashing rules in regulation 6.20 of the SISR, on the basis that the Member was alive to receive it. It was paid to the Member's personal bank account as per their request.

Like the $C 'pension payment', the $B lump sum withdrawal was made only a day or 2 after the Member's financial adviser informed the trustee of the Member's death. While we are not aware of the processing timeframes of the APRA regulated fund in this instance, it can be reasonably assumed that even though the financial adviser notified the APRA regulated fund of the Member's passing on X XXX 20XX or X XXX 20XX, the fund may not have been able to process this notification. Therefore, in this instance the trustee may not have been aware of the member's passing and as such, was acting upon the request of the member.

It is thus reasonable to treat this superannuation benefit as a superannuation member benefit. The tax treatment in Division 301 of the ITAA 1997 should apply to the benefit.

Payment of $C received on X XXX 20XX

The $C payment was not a superannuation income stream benefit for ITAA 1997 purposes as the superannuation income stream ceased upon the Member's death on X XXX 20XX.

The trustee made a routine 'pension payment' of $C from the Member's pension phase account to X's personal bank account on X XXX 20XX. This was not a one-off payment requested by the Member: the transaction history for the Member's pension phase account (issued on X XXX 20XX) confirmed payments of $C made on or around the X^th of each month for the last a few months of the Member's life. This is also consistent with the Application where we have been advised that the pension amount set for the 20XX-XX financial year was $C per month. The payment was one of a regular series of payments from their account-based pension, pursuant to the Member's request to receive periodic member benefits from their superannuation fund.

The trustee appears to have processed the payment for X 20XX in good faith and on the basis that the Member was alive to receive it. It was paid to the Member's personal bank account as was the usual practice for the payments from their account-based pension.

The $C payment was made only a day or 2 after the Member's financial adviser informed the trustee of the Member's death. The Member's superannuation fund was an APRA regulated fund which relied on the Member's financial adviser or another legal personal representative to notify them of the Member's death. The timing of the payment was around the same time as the previous regular pension payments before the fund trustee could be expected to have acted upon notification of the Member's death, given the circumstances of both the Member and the trustee.

It is thus reasonable to treat this superannuation benefit as a superannuation member benefit. The tax treatment in Division 301 of the ITAA 1997 should apply to the benefit.

Payments of $D, $E and $F received on X XXX 20XX, X XXX 20XX and X XXX 20XX respectively

The Member's estate bank account received three additional payments from the Member's accumulation phase account: $D on X XXX 20XX; $E on X XXX 20XX; and $F on X XXX 20XX.

The 3 payments were made months after the Member's superannuation fund was notified of the Member's death and the grant of probate. There is no question as to the timing of these payments.

The 3 payments were also made to the Member's estate bank account. This account was under the care of the Member's legal personal representative. There is no question as to the recipient of these payments. The trustee of the superannuation fund knew that the Member was no longer alive to receive the payments personally.

These lump sum payments are superannuation death benefits, and the tax treatment in Division 302 of the ITAA 1997 should apply. As per subsections 302-10(1) and (3) of the ITAA 1997, they should be treated by the legal personal representative in their capacity as trustee for the deceased estate as if they were paid to non-dependants and should be taxed as if they were income to which no beneficiary was presently entitled within the deceased estate.

We note, these 3 payments were not made in accordance with paragraph 6.21(2)(a) of the SISR however this does not have any effect on the outcome of this decision.