Edited version of private advice

Authorisation Number: 5010107482037

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This edited version has been found to be misleading or incorrect. It does not represent the ATO's view of the relevant law.

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Date of advice: 25 September 2024

Ruling

Subject: Superannuation member benefit or death benefit

Question

Is the withdrawalof the Member's account to the amount of $XXX,XXX.XX that was requested shortly before their death on X XX 20XX but received after their death in a lump sum on XX XX 20XX, a superannuation member benefit under subsection 307-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

The super withdrawal is a member benefit.

This private ruling applies for the following period:

Income year ending 30 June 2024

The scheme commenced on:

1 July 2023

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.

The Member was over 65 years old at the date of their death on XX XX 20XX (Date of Death)

The Member held one superannuation account with their superannuation fund:

Table 1: Superannuation benefits as of 1 July 20XX

The Member resided with their child, as they required daily care and supervision due to declining health.

The child (Administrator) was granted Power of Attorney on XX XX 20XX

The Member was admitted to hospital on XX XX 20XX as they were experiencing chest pain. The Member was later transferred to another hospital.

It was assumed at the time that the Member would recover from the illness and return home.

On XX November 20XX, the Administrator contacted the Members Super Fund via phone, to request the closure of the Member's superannuation account. This was granted without the requirement to lodge a paper or portal request as stated in an email received on XX September 20XX, after a request for further information was issued.

A short time after the Administrator made the request via phone to the Member's super fund, the Member passed away in hospital.

The super fund issued a letter to the Member on XX November 20XX advising the lump sum amount of $XXX,XXX.XX and pension amount of $XX,XXX.XX has been deposited in the Member's nominated account and the account was closed.

Payment of the benefits from the Super Fund were deposited into the Member's bank account 4 days after the death of the member.

It appears that the super fund was not aware that the Member had passed away.

The Administrator has since closed the Members bank account and all funds have been transferred to a solicitor's trust account pending distribution to beneficiaries of the Members last will and testament.

Detailed reasoning

Release of benefits

Legislative framework

The Member was over 65 years of age 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 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 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 a lump sum of $XXX,XXX.XX and pension amount of $XXXX.XX paid from the Member's account as requested shortly before their death but received in their bank accountafter their death on, 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:

•                     section 302-140 states that the tax-free component is non-assessable and non-exempt income

•                     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:

•                     the terms of the member's request

•                     the terms of the trust deed and any other governing rules

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

•                     the entity that the payment is being paid to

•                     the circumstances and timing of the payment, and

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

Lump sum benefit

At the time the Administratorsubmitted 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:

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

•                     cash the whole or a part of their benefits (consistent with subregulation 6.20(2) of the SISR), and

•                     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:

•                     We assume that the benefits were paid in accordance with the Super Fund's trust deed and other governing rules.

•                     The lump sum benefits were 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 their death.

•                     The superannuation fund was not aware of the Member's death before it paid the lump sum benefits.

•                     The lump sum was paid into the Member's personal bank account, as the Trustee was unaware of the Member's death and payment of the lump sum was paid four days after the event, it can be said that the Trustee made the payments 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.XX as a superannuation member benefit. The tax treatment in Division 301 of the ITAA 1997 should apply to the benefit.