Edited version of private advice

Authorisation Number: 1052132966588

Date of advice: 17 November 2023

Ruling

Subject: Member benefit or death benefit

Question

Are the payments made by the Fund to the Deceased, shortly after their death, superannuation member benefits as per section 307-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This private ruling applies for the following period:

Year ending 30 June 2022

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

•         The Deceased died in the 2021-22 income year aged over 65 years.

•         The Deceased was a member of a self-managed superannuation fund (the Fund).

•         The Deceased was the sole member of the Fund.

•         A director of the corporate trustee acted as enduring power of attorney (EPOA) on behalf of the Deceased due to the Deceased's loss of capacity.

•         One week before the death of the Deceased, the Trustee provided written instruction to the Financial Advisor (financial adviser for the Deceased and the Fund) in their roles as EPOA of the Deceased and director of the Fund for the entire balance of the Deceased's superannuation entitlements in the Fund to be transferred to the personal bank account of the Deceased with immediate effect.

•         The above instruction to transfer the superannuation entitlements included the request that all share, unit and managed fund holdings in the Fund's investment portfolio be sold and the cash balance transferred to the personal bank account of the Deceased. An Account Closure form (the Form) was prepared and signed by the Trustee and provided to the Financial Advisor.

•         The Form was lodged within the bank's systems one week before the death of the Deceased.

•         A copy of an email from the bank was provided that stated the Trustee requested to close the Deceased's bank account one week before the date of death, and a verbal confirmation of the transfer request was provided by the client to the bank the next day. There were no further requirements from the client in order to have the request actioned.

•         It was stated that the Financial Advisor commenced trading and selling down the investments held by the superannuation accounts on or before 4 days before the date of death. This is reflected in the transaction account history for the Deceased's bank account.

•         Following the above instruction, two cash amounts were paid to the Deceased's personal bank account before their passing.

•         The Financial Advisor was informed of the Deceased's death on the day they passed away.

•         Two cash amounts were paid to the Deceased's personal bank account after their passing:

o   One day after death: $xxx

o   Two days after death: $xxx

•         You contend that the payments made after the death of Deceased were delayed due to the timing of the completion of the redemption of managed fund units held within the Fund's investment portfolio. Despite the timing delay in the managed fund redemptions, all efforts had been made to pay these benefits to the Deceased prior to their passing.

Relevant legislative provisions

Income Tax Assessment Act 1997 division 301

Income Tax Assessment Act 1997 section 307-5

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

Superannuation Industry (Supervision) regulations 1994 regulation 6.20

Superannuation Industry (Supervision) regulations 1994 regulation 6.21

Reasons for decision

Detailed reasoning

Death benefit, member benefit

When a superannuation fund makes a payment of member's entitlements, the benefit will be assessed depending on the characteristics of the payment.

Subsection 995-1(1) of the ITAA 1997 defines 'superannuation benefit' as having the meaning given by section 307-5. Subsection 307-5(1) defines the term superannuation benefit as being a payment described in the table:

Table 1: Types of superannuation benefits

Subsection 307-5(2) of the ITAA 1997 further clarifies that a payment described in column 2 of the table is a superannuation member benefit. Under subsection 307-5(4) a superannuation death benefit is a payment described in column 3 of the table.

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 trustee of the superannuation fund must assess whether the amount that the member requested to be paid is a member benefit or a death benefit based on the facts known at the time of the payment, including:

a.    the terms of the member's request;

b.    the terms of the trust deed and any other governing rules;

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

d.    the entity that the payment is being paid to;

e.    the circumstances and timing of the payment; and

f.      whether the payment is made because of and consistent with the member's request.

In this case, at the time the Administrator submitted the payment request, the Member had already satisfied a 'nil' condition of release (attaining the age of 65 years) and her superannuation benefits had been converted to unrestricted non-preserved benefits. She was thus entitled to:

a.    voluntarily cash her benefits at any time (consistent with subregulation 6.20(1) of the Superannuation Industry (Supervision) Regulations 1994 (SISR));

b.    cash the whole or a part of her benefits (consistent with subregulation 6.20(2) of the SISR); and

c.     cash the benefits as one or more lump sums (paragraph 6.20(3)(a) of the SISR) or one or more pensions (paragraph 6.20(3)(b) of the SISR).

The SISR permitted the release of superannuation benefits when the Member met the 'nil' condition of release of death. Subregulation 6.21(1) of the SISR states that a member's benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.

Considering the facts, at the time of the payment of the lump sum benefit:

a.    We assume that the benefit was paid in accordance with the superannuation fund's trust deed and other governing rules.

b.    The lump sum benefit was paid to the Member's personal bank account in accordance with a valid request made by the Administrator (on the Member's behalf) prior to her death.

c.     The two-week period between the payment request and receipt of the payment in the Member's personal bank account is a reasonable period for the trustee of the superannuation fund to action the withdrawal, including selling down the investments within the Member's pension phase account.

d.    The process of making the payment, as directed by the Trustee, was in the final days of motion prior to the passing of the Deceased and could not automatically be stopped.

Accordingly, it is reasonable to treat the superannuation lump sum benefit payments as a superannuation member benefit. The tax treatment in Division 301 of the ITAA 1997 should apply to the benefit.