Edited version of private advice

Authorisation Number: 1052173599227

Date of advice: 3 October 2023

Ruling

Subject: Superannuation member benefit or death benefit

Question

Is the withdrawal of the Late XXXX (the Member) account to the amount of$XXXX that was requested shortly before their death on XX XX 2022 but received after their death in a lump sum on XX XX 2022, a superannuation member benefit or superannuation death benefit?

Summary

The lump sum payment is a superannuation member benefit, and is taxable under Division 301.

Detailed reasoning

Release of benefits

Legislative framework

1.    The Member was XX years old at the date of their death. This meant the member had already satisfied the condition of release in Schedule 1, item 106 of the table in Part 1 of the Superannuation Industry (Supervision) Regulations 1994 (SISR) by reaching the age of XX 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.

2.    The Member's death on XX XX 2022 then resulted in them 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 subregulations 6.21(2A) and (2B) of the SISR.

Legislative framework - Taxation of benefits

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

4.    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.

5.    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.

6.    The Income Tax Assessment (1997 Act) Regulations 2021 (ITAR 2021) specifies a superannuation benefit for the purposes of subsection 307-70(1) and the definition of 'superannuation income stream' for the purposes of subsection 307-70(2) and are not discussed further in this response.

7.    If a superannuation benefit does not satisfy the ITAR's definitions of a superannuation income stream benefit, subsection 307-65(1) of the ITAA 1997 states:

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

Application - Taxation of benefits

8.    The benefit of $XXXX paid from the Member's account as requested shortly before their death on XX XX 2022 but received in their bank account after their death on XX XX 2022, is a superannuation lump sum. This is a straightforward application of subsection 307-65(1) ITAA 1997.

Type of superannuation benefit

Legislative framework

9.    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).

10.  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.)

11.  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.

12.  As the Member did not have any death benefits dependants this response will not discuss Subdivision 302-B further.

13.  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:

(a)          section 302-140 states that the tax-free component is non-assessable and non-exempt income;

(b)          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

14.  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.

15.  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.

16.  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.

Lump sum benefit

17.  At the time the Member submitted the payment request, the Member had already satisfied a 'nil' condition of release attaining the age of 65 years and their superannuation benefits had been converted to unrestricted non-preserved benefits. They were thus entitled to:

(a)          voluntarily cash their benefits at any time (consistent with subregulation 6.20(1) of the SISR);

(b)          cash the whole or a part of their 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).

18.  The SISR also 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.

19.  Considering the facts, at the time of the payment of the lump sum benefit, the Trustee of the Member's fund was unlikely to have any knowledge of the Member passing away.

20.  The fund is an industry fund, and not a self-managed superannuation fund.

21.  It has been stated that there was no expectation of the Member's sudden passing.

22.  On XX XX 2022, an amount of $XXXX. consisting of the entirety of the Member's benefits (all unrestricted non-preserved), was paid from the Member's fund to her personal bank account, appearing in the account the following day.

23.  On XX XX 2022, prior to her death the following day, the Member had applied for the payment. It has been stated that the purpose of the request for payment was to enable her go into fulltime care in a nursing home.

24.  The payment was made because of, and consistent with, the Member's request.

25.  The trustee of the Member's superannuation fund appears to have processed the 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 her request.

26.  The benefit of $XXXX paid from the Member's account as requested before her death, but received after her death, is a superannuation lump sum benefit. This is a straightforward application of subsection 307-65(1) of the ITAA 1997.

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