Edited version of private advice

Authorisation Number: 1052314586875

Date of advice: 1 November 2024

Ruling

Subject: Superannuation death benefits

Question 1

Is the withdrawal of the Member's account that was requested shortly before their death but will be paid after their death in a lump sum, a superannuation member benefit under subsection 307-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

No, the payment from the Member's account is a superannuation death benefit under subsection 307-5(4) of the ITAA 1997.

This private ruling applies for the following period:

Income year ending 30 June 20XX

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect, and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1             The Member was over 65 years of age and eligible to withdraw the funds in their superannuation account.

2             On XX/XX/XXXX the Fund received an application for withdrawal of the balance of funds in full as a lump sum. The forms were submitted online.

3             The Member passed away on XX/XX/XXXX. On the same day the Fund sent a member statement to the Member. The balance within the fund on XX/XX/XXXX included a taxable component of $XXXXXX and a tax-free component of $XXXXXX. The Member nominated you and X other beneficiaries to receive the funds following the death of the Member.

4             On XX/XX/XXXX the Fund commenced the withdrawal payment process. As one of the first steps in the process, the Fund rang the Member's mobile number for the purpose of verifying the withdrawal request but there was no answer. A message was left asking for a call back to discuss the withdrawal request. The Fund also sent an email to the Member's email address advising that they attempted to call to discuss the recent withdrawal application and requested the Member to call back to discuss outstanding requirements.

5             On XX/XX/XXX the Fund once again attempted to contact the Member's mobile number to verify the withdrawal request. You answered the call and advised the Fund that the Member had passed away. The Fund then informed you that the withdrawal must be treated as a death benefit rather than a member withdrawal. You were dissatisfied with this decision noting that the Fund did not complete the payment in X business days. You were also dissatisfied that the Fund did not disclose the process of having to contact the Member before making the payment.

6             While the Fund provides that withdrawals are 'typically processed within X (business) days', it took them longer to commence the process. You therefore made a complaint to the Fund in relation to the timeframe. The Fund provided you the below complaint outcome:

•                    There was adequate disclosure that the Fund may contact members to verify instructions or request additional information. While the fund aims to meet the X business days timeframe, it is not guaranteed that the timeframe is achieved.

•                    Pursuant to relevant legislation and guidance, they are of the view that the benefit should be paid as a death benefit.

7             As of XX/XX/XXXX, the Fund had not paid any amounts from the Member's account to the Member or to the beneficiaries due to the disagreement relating to the classification of the payment.

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 1997 section 307-65

Income Tax Assessment Act 1997 section 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

Detailed reasoning

Release of benefits

Legislative framework

8             The Member was over 65 at the date of 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.

9             The Member's death on XX XXX 20XX 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

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

11           Section 307-5 of the ITAA 1997 states: 307-5(1) A superannuation benefit is a payment described in the table'.

A superannuation benefit is a payment described in the table or subsection:

(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.

12           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.

13           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.

14           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

15           The benefit, as requested shortly before the Member's death on 20 June 2024 but will be paid from the Member's account after their death as a lump sum payment is a superannuation lump sum. This is a straightforward application of subsection 307-65(1) ITAA 1997.

Type of superannuation benefit

Legislative framework

16           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).

17           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.)

18           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.

Death benefit or member benefit

19           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.

20           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.

21           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

22           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 therefore entitled to:

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

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

23           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.

24           Applying the facts to the indicators as listed at paragraph 21:

(a)          On XX/XX/XXXX the Member submitted an (online) application, which requested that all amounts in the Fund be paid out as a lump sum, directly to the Member.

(b)          The Commissioner considers that as part of the governing rules of the Fund, it was reasonable for the Fund to follow their rules to contact the Member to verify the withdraw instruction or request additional information. In this case, following such rule was likely one of the factors that contributed to the longer timeframe of payment processing.

(c)          On XX/XX/XXXX the Fund became aware that the Member had passed away, before they could actually make the payment.

(d)          As of XX/XX/XXXX, the Fund had not paid any amounts from the Member's account. As the Fund is aware that the Member has passed away, the 'entity' that the payment is being made to, will not be the Member. In other words, the payment will not be made directly to the Member's personal bank account, but will most likely be made to the trustee of the late Member's deceased estate or to the beneficiaries.

(e)          The Fund is still of the view that the benefit should be paid as a death benefit, and the timing of the payment has been significantly delayed (due to the disagreement relating to the classification of the payment).

(f)          As analysed in paragraph d above, the payment will not be made consistent with the Member's request.

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