Edited version of private advice

Authorisation Number: 1052215520091

Date of advice: 7 February 2024

Ruling

Subject: Superannuation member benefit or death benefit

Question

Is the commutation and releasedof the Late X's (the Member) account to the amount of$XXX,XXX that was requested shortly before their death on X XX 20Yy but received after their death in a lump sum on X XX 20YY a superannuation member benefit or superannuation death benefit?

Answer

The commutation and release from the Member's account was a superannuation death benefit.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

The member was over 65 years old at the date of their death on X XX 20YY

The Member was a member of a self managed super fund (the Fund).

The Trustee of the Fund is a Corporate Trustee.

XXX held power of attorney over the member.

On X XX 20YY the Member suffered a serious fall.

On XX XX 20YY the Member was recorded declaring that they wanted to withdraw their superfund pension balance immediately. A letter to the Corporate Trustee confirming that their wishes to withdraw their pension was signed by their enduring power of attorney. The Directors of the Corporate Trustee replied confirming that they had received the request. Minutes of a Fund meeting held by the Directors confirm that they formally acknowledged the Members request.

On XX XX 20YY, $XXX,XXX was paid out to the Members personal bank account from their pension account. The Fund's finance broker sold shares to provide sufficient liquidity to pay out the Member's pension in full and advised that they would transfer these funds on weekday DD MM 20YY.

On XX XX 20YY the Member passed away.

On XX XX 20YY the Fund's finance broker was notified of the death of the Member by the Directors. The finance broker advised the Directors that due to an oversight they had failed to transfer the funds to the Member's personal bank account

On XX XX 20YY the Fund's finance broker transferred $XXX,XXX from the sale of the shares to the Member's personal bank account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 301

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997section 307-65

Income Tax Assessment Act 1997section 307-70

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

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

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

Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.12

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.20

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.21

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

Reasons for decision

Question

Is the commutation and releaseof the Late X's (the Member) account to the amount of$XXX,XXX that was requested shortly before their death on X XX 20YY but received after their death in a lump sum on X XX 20YY a superannuation member benefit or superannuation death benefit?

Summary

The payment, totalling $XXX,XXX paid to the Members personal bank account, after their passing, is a superannuation death benefit.

Detailed reasoning

Release of benefits

Legislative framework

The Member was over 65 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 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 XX X 2023 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

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 1 Description of payment

(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.

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.

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

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

Type of superannuation benefit

Legislative framework

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 this response will not discuss Subdivision 302-B 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:

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

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.

Lump sum benefit

At the time the Membersubmitted 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).

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.

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

d.            We assume that the benefits were paid in accordance with the SMSF's trust deed and other governing rules

e.            The lump sum benefit was paid to the Member's personal bank account in accordance with a valid request made by the Member prior to their death.

f.            The Fund's finance broker failed to pay the lump sum benefit prior to the Members death due to an oversight.

g.            The Directors of the Corporate Trustee and the Fund's finance broker were aware of the Members death before the lump sum benefit was paid.

h.            Even though the lump sum was paid into the Member's personal bank account, as the Directors and the Fund's finance broker were aware of the Members death and payment of the lump sum was paid after, it cannot be said that the payment was made with the expectation that the Member would be alive to receive it.

Accordingly, it is reasonable to treat the total superannuation lump sum benefit of $XXX,XXX as a superannuation death benefit. The tax treatment in Division 302 of the ITAA 1997 should apply to the benefit.