Edited version of your private advice

Authorisation Number: 1052244805103

Ruling

Subject: PAYG - withholding

Question

Does the trustee of the estate have a Pay As You Go (PAYG) withholding obligation under section 12-85 of Schedule 1 to theTaxation Administration Act 1953(TAA) in respect of a superannuation lump sum death benefit paid to a resident of the Foreign Country

Answer

Yes.

This ruling applies for the following:

Income year ending 30 June 20YY

The scheme commenced on:

1 July 2020

Relevant facts and circumstances

On XX XX XXXX, the deceased person (the Deceased) passed away.

The Deceased held an account with an Australian superannuation fund (the Fund).

In the Last Will and Testament of the Deceased, dated XX XX XXXX (the Will), the Deceased appointed two executors, Executor A and Executor B.

The Will stated that all superannuation entitlements of the Deceased were to be distributed to three beneficiaries as follows:

•         35% to Beneficiary A (Beneficiary A is also Executor A)

•         10% to Beneficiary B (Beneficiary B is also Executor B)

•         55% to Beneficiary C

On X XX XXXX, the amount of $XXX,XXX.XX was paid by the Fund to the estate's bank account. No tax was withheld on this payment.

You have stated in your request for a private binding ruling that:

•         Beneficiary A is an Australian citizen, and resides in Australia

•         Beneficiary B is an Australian citizen, and resides in Australia

•         Beneficiary C is a Foreign citizen, and resides in the Foreign Country

Assumptions

Beneficiary C is a resident of the Foreign Country for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 302-145

Income Tax Assessment Act 1997 section 307-5

Income Tax Assessment Act 1997 section 307-65

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

Taxation Administration Act 1953 section 12-1 of Schedule 1

Taxation Administration Act 1953 section 12-85 of Schedule 1

Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains - Article 17

Convention betweenthe Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains - Article 20

Reasons for decision

Superannuation lump sum benefit

Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) sets out payments from which amounts must be withheld. In particular, section 12-85 of Schedule 1 to the TAA states:

An entity must withhold an amount from any of the following payments it makes to an individual:

(a)          a *superannuation lump sum;

(b)          a payment that is an *employment termination payment or would be one except that it is received more than 12 months after termination of employment.

A superannuation lump sum is described in section 307-65 of the Income Tax Assessments Act 1997 (ITAA 1997) as superannuation benefit that is not a superannuation income stream, as defined in section 307-70 of the ITAA 1997.

There are exceptions to section 12-85 of Schedule 1 to the TAA which are listed in section 12-1 of schedule 1.

No exceptions apply under section 12-1 to superannuation lump sum death benefits paid to non-dependant beneficiaries.

Section 307-5 of the ITAA 1997 defines a superannuation death benefit as 'a payment to you from a superannuation fund, after another person's death, because the other person was a fund member'.

The taxable component of a superannuation death benefit paid as a lump sum to a non-dependant beneficiary is assessable income and is taxed under section 302-145 of the ITAA 1997.

Subsection 995-1(1) of the ITAA 1997 defines a death benefits dependant as follows:

A death benefits dependant, of a person who has died, is

a.            the deceased person's spouse or former spouse; or

b.            the deceased person's child, aged less than 18; or

c.            any other person with whom the deceased person had an interdependency relationship under section 302-200 just before he or she died; or

d.            any other person who was a dependant of the deceased person just before he or she died.

A superannuation death benefit paid to a deceased estate will continue to keep its character as a superannuation death benefit within the deceased estate.

It is the responsibility of the executor to pay any superannuation death benefits tax from the deceased estate before it is distributed to the ultimate beneficiaries. Where death benefits are paid by the estate to a non-dependant beneficiary, the trustee of the deceased estate will be responsible for declaring and paying tax on the taxable component of the death benefit.

Under section 302-145 of the ITAA 1997, a superannuation death benefit paid to a non-dependant is taxed as follows:

•         element taxed in fund - 15%

•         element untaxed in fund - 30%

In determining liability to tax on Australian-sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty or double tax agreement.

Tax treaty

The Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains (the Foreign Country Convention) operates to avoid the double taxation of Australian and Foreign Country residents, by giving the source jurisdiction a taxing right over selected types of income.

The Foreign Country Convention does not have an Article that specifically addresses lump sum payments.

Article 17 of the Foreign Country Convention deals with pensions and annuities. Under Article 17, pensions (including government pensions) and annuities are to be taxed only in the country of residence of the recipient. However, Article 17 does not apply to a superannuation lump sum, as it is not a pension for the purposes of Article 17.

Article 20 of the Foreign Country Convention will apply here. Article 20 provides for items of other income, which are not dealt with by any particular Article. Paragraph 3 states that such income, derived by a resident of one country, is to be taxed only in the country of residence, unless it is from sources in the other country, in which case the income may also be taxed in the other country.

Where the income may be taxed in both countries, in accordance with this provision, the country of residence of the recipient of the income is obliged by Article 22 (Elimination of double taxation) to provide relief.

Conclusion

The estate has a PAYG withholding obligation under section 12-85 of Schedule 1 to the TAA.

This obligation is not changed by the fact that a payment may be taxable in two different tax jurisdictions, being the source of the payment, and the country of residence of the recipient of the payment.