Edited version of private advice

Authorisation Number: 1052099804169

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Date of advice: 28 July 2023

Ruling

Subject: Superannuation death benefit

Question

Is the trustee for a deceased estate required to lodge a trust estate income tax return for the income year ending 30 June YYYY on behalf of the deceased's estate which includes the taxable component of the lump sum superannuation death benefit paid to the trustee of the estate by an APRA regulate superannuation fund during the YYYY income year?

Answer

The trustee for a deceased estate is required to lodge a trust estate income tax return for the income year ending 30 June YYYY on behalf of the deceased's estate which includes the taxable component of the lump sum superannuation death benefit paid to the trustee of the estate by an APRA regulate superannuation fund during the YYYY income year.

This ruling applies for the following period:

Year ending 30 June YYYY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

1.    Individual A ('the deceased') died on DD MM YYYY at an age of over 60 years without a will (intestate).

2.    Individual B was appointed Independent Administrator of the estate by NSW Supreme Court orders dated DD MM YYYY in the income year following the year that following the year that Individual A died - the YYYY income year.

3.    The deceased was survived by Individual C, the deceased's de facto spouse (a tax dependant of the deceased) aged over 60 years and two adult children, Individual D and Individual E both over the age of 25 years (both non-tax dependants of the deceased).

4.    The estate assets are comprised of the deceased's main residence, worth $E (valued at around $V less an outstanding loan amount of $L), Superannuation Lump Sum (State Super) of $S, cash at bank $C and other assets (boat, car & furniture etc) worth $O.

5.    The Independent Administrator ('the Administrator' or 'the Trustee') was granted Letters of Administration by the court and started administering the estate from at date during the YYYY income year.

6.    A Superannuation Lump Sum Death benefit of $LSDB (Tax-free component $TF - X%, Taxable component - taxed element $TC - Y% - Untaxed element $UE - 0%), was paid into the estate during YYYY income year.

7.    A court order issued in the YYYY income year by the Supreme Court made orders that the two adult children would receive $Cash in total (divided between them in equal amounts) as legacies (along with the other assets) and that the de facto spouse was to receive the residue of the estate (after costs and administration expenses in relation to the estate).

8.    The court order also specifically made orders that:

•         each lump sum to be paid to the adult children be paid within 28 days of the date of the making of the orders

•         no interest is to be paid on each lump sum, if it is paid, respectively, within 28 days of the making of the orders; and if not so paid, interest is to be paid on any unpaid part thereof, respectively, calculated at the rate prescribed by s 84A(3) of the Probate and Administration Act 1898 (NSW), from the 29^th day from the date of making the orders until the date of payment in full.

9.    The intention of the Administrator was to pay the entire Super Lump Sum Death Benefit to the de facto spouse, whilst using available surplus cash to pay the non-dependents' legacies. Due to circumstances involving a delay in selling the deceased's realty and the obligation to pay the children the court ordered legacies, a mix of funds from cash in the estate and the superannuation death benefit payment was used to pay the legacies pursuant to the court order. On a date in the YYYY income year the legacy payments (slightly exceeding the court ordered legacies) were made to the two adult children. This was funded from cash at bank and a portion of the cash from the Superannuation Lump Sum Death Benefit.

10. The estate is not fully administered as the realty is currently on the market, and when sold (expected to be within the next months) the entire estate residual will be paid to the de facto spouse with other residuals, if any.

11. The only other income of the estate is bank interest.

12. The final date of death income tax return for the deceased was completed and lodged on a date in the YYYY income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 101A(3)

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 subsection 302-5(1)

Income Tax Assessment Act 1997 subsection 302-5(4)

Income Tax Assessment Act 1997 section 302-10

Income Tax Assessment Act 1997 section 302-140

Income Tax Assessment Act 1997 section 302-145

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

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 section 307-60

Income Tax Assessment Act 1997 section 307-65

Income Tax Assessment Act 1997 section 307-70

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

Reasons for decision

Superannuation death benefits paid to the trustee of a deceased estate

13.   For superannuation death benefits paid after 1 July 2007, subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997.

14.   A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in Column 3 of the table in subsection 307-5(1) of the ITAA 1997. A superannuation death benefit is described in Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997 as:

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

15.   A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream as defined in section 307-70 of the ITAA 1997.

16.   In this case the deceased died in the year preceding the YYYY income year. Prior to the deceased's death the deceased was a member of an Australian superannuation fund (the Fund).

17.   A payment was made directly to the Trustee of the deceased estate during the YYYY income year from the Fund after the deceased's death, because the deceased was a fund member. Hence the payment is a superannuation death benefit within the meaning of Column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997.

18.   The payment is a superannuation death benefit as defined in subsection 307-5(4) of the ITAA 1997 and a superannuation lump sum within the meaning of section 307-65 of the ITAA 1997. As the payment was made by the Fund after 1 July 2007, the provisions of Division 302 of the ITAA 1997 apply.

19.   Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (SISR), requires the trustee of a regulated superannuation fund, to 'cash' a member's benefits as soon as practicable following the death of the member.

20.   In this case, pursuant to regulation 6.22 of the SISR, the member's benefits were cashed in favour of the legal personal representative (the administrator of the deceased estate).

21.   The term 'cashed' is not defined in the SISR. For a member's benefits in a fund to be considered cashed, they need to be paid out of the superannuation system per ATO ID 2015/23: Superannuation: Member's benefits in a regulated superannuation fund must be 'cashed' upon death by being paid - mere journal entries insufficient. SMSFD 2011/1 Self Managed Superannuation Funds: for the purposes of the Superannuation Industry (Supervision) Regulations 1994, is a benefit payable with a cheque or promissory note 'cashed' at the time the cheque or note is received by the member or beneficiary? states at paragraph 21. For the purposes of Division 6.3 of the SISR, 'cashing' involves a 'member's benefits in a fund' being 'paid'. This indicates that cashing involves an SMSF making a payment which reduces the member's benefits in the fund.

22.   Once the payment was received by the Legal Personal Representative (LPR), the benefit had left the superannuation system. The sum attributable to the superannuation benefit received from the superannuation was no longer a superannuation amount other than by reference to it as a superannuation death benefit for the purposes of theITAA 1997.

Application of section 101A of the Income Tax Assessment Act 1936 (ITAA 1936) and section 302-10 of the ITAA 1997

23.   In accordance with subsection 101A(3) of the ITAA 1936, the death benefit paid directly to your client as the trustee of the deceased estate should be disclosed in an income tax return lodged by the trustee of the estate for the YYYY income year (that is, the income year in which the death benefit from the superannuation fund was paid to the trustee of the estate).

24.   In relation to how death benefits made to a deceased estate are treated, section 302-10 of the ITAA 1997 states:

302-10(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.

302-10(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.

302-10(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.

Death benefit paid to non-death benefits dependants

25.   The tax-free component of a superannuation lump sum paid to a non-dependant is tax free under section 302-140 of the ITAA 1997. The taxable component of the lump sum is included in the assessable income of the trust estate (in the income year in which the death benefit from the superannuation fund was paid to the trustee of the estate (subsection 101A(3) of the ITAA 1936)). The trust estate is entitled to a tax offset to ensure that the rate of tax on the taxable component-element taxed in the trust estate does not exceed 15% and that the rate of tax on the taxable component-element untaxed in the trust estate does not exceed 30% (section 302-145 of the ITAA 1997). No Medicare levy or Medicare levy surcharge is added to the rates mentioned above, as for tax law purposes the benefit is taken to be income in the trust estate to which no beneficiary is presently entitled (section 302-10 of the ITAA 1997).

26.   In this case, the deceased's two adult children are not death benefit dependants (within the definition of section 302-195 of the ITAA 1997). Therefore, the death benefits paid to them will be taxed as explained above, in the hands of the trust estate. The death benefit payment to the Trustee did not include any taxable component-element untaxed, therefore, only-tax free and taxable component-element taxed components need to be considered.

27.   The amounts distributed from the trust estate to the deceased's two adult children are not required to be included as taxable income in their income tax returns for the YYYY income year because the amounts represent a distribution of the corpus of the estate.

Death benefit paid to death benefits dependant

28.   Under section 302-60 of the ITAA 1997, a superannuation lump sum that a death benefits dependant receives because of the death of a person of whom they are a death benefits dependant is not assessable and not exempt income.

29.   In this case, the deceased's de facto spouse (Individual C) is a death benefits dependant of the deceased (under subsection 302-195(1) of the ITAA 1997). Therefore, the entire amount of any of the superannuation death benefit paid to Individual C, or which Individual C may be expected to benefit from, will be tax free and is not required to be included as taxable income in the trust estate tax return or any income tax return of Individual C.

Determination of the extent to which the beneficiaries have benefited from the superannuation death benefit

30.   In the absence of a will providing the Trustee of the deceased estate with discretionary powers to 'stream' the death benefit to dependant beneficiaries, the trustee will need to determine the amount that each of the beneficiaries has benefited from the superannuation death benefit.

31.   The trustee is required to adopt a proportional approach as follows:

Step 1: Determine the amount of the taxable component - taxed element as percentage of the total residuary estate as a percentage, i.e.:

(Amount of taxable component taxed element / Amount of total residuary estate) × 100 = X%

Step 2: Multiply the percentage calculated at Step 1 by the total amounts paid out of the residuary estate to the non-dependant beneficiaries, i.e.: X% x $Total amount paid to the non-dependant beneficiaries = $Y

Action required to ensure that the superannuation death benefits payments are taxed correctly

32.   The Trustee of the trust estate should lodge a trust estate tax return for the YYYY income year disclosing the amount of taxable component-taxed element of the superannuation death benefit that the non-dependant beneficiaries of the estate have benefitted from (i.e. $Y calculated above).

The trustee will have the responsibility of paying the applicable tax. The amounts of the taxable component-taxed element paid to the beneficiaries are subject to tax offsets so that the effective maximum rates of tax on these elements is 15% (section 345-145 of the ITAA 1997).

33.   No amounts of the superannuation death benefit distributed from the estate to any of the beneficiaries are required to be shown in their taxable income in their individual tax returns in any income year, because these amounts represent a distribution of the corpus of the estate.

When a trust tax return is required

34.   For the first 3 income years of a deceased estate, you must lodge a trust tax return if any of the following apply in that year:

•         the deceased estate's net income is more than the tax-free threshold for individuals

•         a beneficiary is presently entitled to any of the estate's income at the end of the income year

•         a beneficiary of the estate is not an Australian tax resident.

For income year 4 and later income years, you must lodge a trust tax return if the deceased estate earns any income (including capital gains).

You can lodge a trust tax return even if it is not required. For example, you may wish to lodge a return to claim franking credits on dividends paid to the estate.

The first income year of a deceased estate starts the day after the person died and ends on the next 30 June.