1 Does subsection 302-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the superannuation death benefits paid to the trustee for the deceased's estate?
1 Yes. This ruling applies for the following periods : Financial year ending 30 June 20XX Financial year ending 30 June 20XX The scheme commenced on: 1 July 2021
1. On XX XX 20XX, the deceased (the Deceased) passed away (Date of Death). 2. The Last Will and Testament of the Deceased (the Will), witnessed XX XX 20XX, appointed as executors (Executors) and trustees (Trustees) of the Will, the following individuals: • the Deceased's spouse (Spouse) • the Deceased's sibling (Sibling 1) • the Deceased's sibling (Sibling 2) 3. The Will nominated/stipulated as Primary Beneficiaries of the Deceased's estate (the Estate) the following individuals: • the Spouse • the Deceased's child (Child) 4. On XX XX 20XX, probate was granted to the Executors. 5. On XX XX 20XX, the Deceased's superannuation fund, (the Fund) paid the following superannuation lump sums to the Estate: Payment 1 Amount: $X,XXX,XXX Taxed Element: $X,XXX,XXX Tax-free Component: $XX,XXX Payment 2 Amount: $X,XXX Taxed Element: $X,XXX Tax-free Component: $XX Both payments were classified as death benefits, and no tax was withheld from either payment. 6. The Estate has not lodged income tax returns for either the 20XX or 20XX income years.
7. On XX XX 20XX, a private binding ruling, reference number XXXXXXXXXXXXX, was issued to the Estate, ruling that Primary Beneficiary, the child, was a death benefits dependant of the Deceased, according to paragraph 302-195(d) of the ITAA 1997, due to being a person who was a dependant of the Deceased just before he died. 8. Sub-clause 4(d) of the Will, in the event of the Spouse surviving the Deceased, directs the Executors to divide the balance of the Residuary Estate into 'the Spouse's share' (for their spouse) and 'the Child's share' (for their child), calculated in accordance with the directions in clause 5, with the Spouse's share to either be distributed or held on trust, and the Child's share to be held on trust, with the provisions of clause 9 to apply to each such trust. 9. Sub-clause 5(d) of the Will states that the Child's share is equal to the sum of the Deceased's 'Superannuation Death Benefit' and the Deceased's 'non-super assets', divided by two (or such lesser amount as shall exhaust the Residuary Estate), while the Spouse's share is equal to the Residuary Estate, less the Child's share.
10. Sub-clause 9(a) of the Will states that any Primary Beneficiary for the trust determined by the Will, will be the Trustee and Appointor of that trust. 11. Under sub-clause 9(c) of the Will, if a Primary Beneficiary has not attained the Prescribed Age, the Executors will be the Trustee and Appointer of the trust in his or her place, until such time the Primary Beneficiary attains the Prescribed Age. 12. Under Paragraph (1) of Schedule 1 of the Will, 'Definitions and Rules of Interpretation': (d) 'Primary Beneficiary ' means the person who is, or the persons who are, nominated by me under this Will to be the Primary Beneficiary or Primary Beneficiaries of a trust created pursuant to the terms of this Will. (e) 'Prescribed Age' means the age of twenty five (25) years (g) 'Superannuation Death Benefit' means any benefit or entitlement which is payable following my death by any superannuation fund or scheme of which I am a member or in respect of which I have an entitlement at the date of my death (including all amounts payable under any policy of insurance within my superannuation). (h) 'Testamentary Trust provisions'
means the trust provisions contained in Schedule 2 of this Will (which forms part of this Will). 13. On XX XX 20XX, in accordance with sub-clause 4(d) and clause 9 of the Will, a deed (the Deed) was made, establishing a discretionary testamentary trust by the name of the XXXXXXXX (the Trust). 14. Under the Deed, the Spouse and siblings (Sibling 1 and Sibling 2) were appointed as Trustees and Appointors, the Child (nominated as the Primary Beneficiary) having not attained the Prescribed Age of 25 years. 15. Paragraph 3 of the Deed provides that, upon the Child attaining the age of 25 years, and not suffering a Disqualifying Event (as defined in the Will), she shall assume the role of Trustee and Appointor of the Trust, to the exclusion of the Spouse and Siblings 1 and 2. 16. Paragraph 5 of the Deed provides that the Testamentary Trust Provisions are varied, by replacing the existing definition of 'Beneficiaries in Remainder' in clause 1.1 of those provisions with the following new definition: 'Beneficiaries in Remainder' means a) the Spouse; and/or b) any charity or charities,' as selected by the Trustee.
17. Paragraph 6 states that the Child and the Appointor consented to the above variation. 18. The Testamentary Trust Provisions are contained in the schedule (the Schedule) annexed to the Deed. 19. Relevant clauses in the Schedule include the following: 1. DEFINITIONS & INTERPRETATION 1.1 ... "Beneficiaries" has the following meaning:- a) The Primary Beneficiary; b) Any persons (or persons) who is was or may become the spouse of the Primary Beneficiary; c) Any child, children or remoter issue of the Primary Beneficiary; d) Any person who is, was or may become the spouse of any of the Beneficiaries referred to in sub-paragraphs (c) of this definition; e) Any god-children of the Primary Beneficiary; f) Any trustee (in that capacity) of any trust in which any of the Beneficiaries referred above have any interest (whether actual, contingent or expectant) as a beneficiary and whether such trustee or trust is in existence at or shall come into existence after the date of death of the Testator;
g) Any company in which at least one share is held (either legally or beneficially) by any of the Beneficiaries referred above and whether such company is in existence at the date of death of the Testator or shall be incorporated or registered after that date; h) Any religious or charitable organisation which may be selected by the Trustee. "Trust Property" means: a) That part of the Testator's Estate which is to be held on trust in accordance with the Will (" Initial Property "); b) Any money or other property having the nature of either capital or income acquired or accepted by the Trustee as an addition to the Initial Property (" Additional Property "); c) Any accumulation of income pursuant to these Provisions; d) All accretions to the Trust property; and e) All investments and property for the time being representing the said Initial Property, Additional Property, accumulations and accretions, or any part of them. "Vesting Day" means the earlier of the following days:
a) The day which the Trustee determines by deed to be the Vesting Day (subject to any contrary applicable law or Court order); and b) If clause 12 applies, the Perpetuity Day fixed by that clause. 3. THE TRUSTEE AND THE TRUST PROPERTY The Trust Property and its administration are vested in the Trustee and the Trustee shall be subject to the following provisions: 3.1 The Trustee has an absolute and uncontrolled discretion in the exercise of the authorities and powers vested in the Trustee by these provisions and may at any time exercise or refrain from exercising all or any of those authorities and powers. ... 3.20 The Trustee may in the Trustee's absolute discretion: (a) at any time before the Vesting Day out of the capital of the Trust Property raise any sum and pay the same in addition to any entitlements to income to any of the Beneficiaries for his or her or its own use and benefit or apply the same to or for the maintenance education advancement or benefit of such Beneficiary in such manner as the Trustee in the absolute discretion of the Trustee shall think fit; ... 4. INCOME OF THE TRUST PROPERTY
4.1 The Trustee may at any time during an Accounting Period with respect to all or any part or parts of the income of the Trust Property for that Accounting Period determine whether: (a) to pay, apply or allocate it, or set it aside, to or for any one or more Beneficiaries living or in existence at the time of the determination in such proportions and in such manner as the Trustee thinks fit, unless at the time of the determination there is a Distributor in office in which case the Trustee must pay or apply it or allocate it or set it aside according to the provisions set out in clause 8; or (b) to accumulate it. ... 5. CAPITAL OF THE TRUST PROPERTY 5.1 Notwithstanding anything contained or implied in these Provisions the Trustee may at any time prior to the Vesting Day determine to pay, apply, allocate it or set aside the capital of the Trust Property or any part of it to or for the benefit of any one or more of the Beneficiaries in such proportions and in such manner as the Trustee thinks fit at the time of the determination there is a Distributor in office in which case such determination must be made subject to the provisions set out in clause 8.
Income Tax Assessment Act 1997 section 302-10 Income Tax Assessment Act 1997 section 302-195 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)
These reasons for decision accompany the Notice of private ruling for XXXXXXXXX. This is to explain how we reached our decision. This is not part of the private ruling. Question Does subsection 302-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the superannuation death benefits paid to the trustee for the deceased's estate? Answer Yes. Summary As there is no certainty about the extent to which death benefits dependants will receive, or are expected to receive, the superannuation death benefits, subsection 302-10(3) of the ITAA 1997 does apply, and the benefits should be treated as if they have been paid to a person who was not a death benefits dependant. Detailed reasoning 1. Under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997), a 'superannuation death benefit' has the meaning given by section 307-5 of the ITAA 1997. 2. A superannuation death benefit is defined in subsection 307-5(4) of the ITAA 1997 as being a payment described in column 3 of the table in subsection 307-5(1). Column 3 includes: ... A payment to you from a superannuation fund, after another person's death, because the other person was a fund member.
3. A superannuation death benefit must be paid as either: • A superannuation lump sum; or • A superannuation income stream 4. A superannuation lump sum is described in section 307-65 of the ITAA 1997 as a superannuation benefit that is not a superannuation income stream benefit as defined in section 307-70. 5. Section 307-70 states that a superannuation income stream benefit is 'a superannuation benefit specified in the regulations that is paid from a superannuation income stream', and that a superannuation income stream has the meaning given by the regulations. 6. The benefits in question are lump sums. 7. On XX XX 20XX, the Deceased passed away. Following this, benefits were paid to the Estate by the Fund, because the Deceased was a member of the Fund. As such, the payments are superannuation benefits within the meaning of column 3 of Item 1 of the table in subsection 307-5(1) of the ITAA 1997, and superannuation death benefits as defined in subsection 307-5(4). Superannuation death benefits paid to a trustee of a deceased estate
8. Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to a trustee of a deceased estate. Subsection 302-10(1) of the ITAA 1997 states: This section applies to you if: a) You are the trustee of a deceased estate; and b) You receive a superannuation death benefit in your capacity as trustee 9. As the payments were superannuation death benefits received from a superannuation fund by the Estate, section 302-10 of the ITAA 1997 will apply to the trustees of the Estate. 10. Under section 302-10 of the ITAA 1997, the taxation arrangements for superannuation death benefits paid to a trustee of a deceased estate are determined in accordance with the taxation arrangements that would otherwise apply to the person or persons otherwise expected to benefit from the estate. The provision operates to provide the same tax treatment that would apply were the beneficiary to receive the death benefit directly. 11. Subsection 302-10(2) of the ITAA 1997 states:
To the extent that 1 or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit: a) the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and b) the benefit is taken to be income to which no beneficiary is presently entitled. 12. This means that where a dependant of the deceased is expected to receive part of a superannuation death benefit, that part will be subject to tax as if it were paid to a death benefits dependant of the deceased. If the entirety of the benefit is expected to be received by a dependant, the entire amount of the benefit should be tax-free. 13. Subsection 302-10(3) of the ITAA 1997 states: To the extent that 1 or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit: (a) the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and
(b) the benefit is taken to be income to which no beneficiary is presently entitled. 14. Accordingly, where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, that benefit will be subject to tax as if it were paid to a death benefits non-dependant of the deceased. 15. Subsection 302-195(1) of the ITAA 1997 defines a death benefits dependant of a person who has died as: 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 just before he or she died.
16. Where death benefits have been paid from an estate into a testamentary trust established under a will, the trustee of that testamentary trust holds the assets of the deceased that have been transferred to the trust, for and on behalf of, the nominated beneficiaries. Therefore, consideration of the terms of the trust and who has benefited, or may be expected to benefit, from the superannuation death benefits is required, in order to determine the relevant tax treatment of the death benefits paid to the deceased's estate. Application to your situation 17. In this case, the Child's share of the Estate, including the superannuation death benefit proceeds, is held in the Trust established as per clause 9 of the Will. The Child is a death benefits dependant under subsection 302-195(1) of the ITAA 1997, due to having been in an interdependency relationship with the Deceased, just before they died. 18. As per sub-clause 9(c) of the Will, as the Child has not reached the Prescribed Age, the Executors have been appointed Trustees and Appointors of the Trust.
19. Under clause 3.20 of the Deed, the Trustee may, in the Trustee's absolute discretion, at any time before the Vesting Day, raise any sum out of the capital of the Trust property (which includes the superannuation death benefit) and pay it to any of the Beneficiaries 'for his or her or its own use and benefit or apply the same to or for the maintenance education advancement or benefit of such Beneficiary in such manner as the Trustee in the absolute discretion of the Trustee shall think fit'. 20. Under clauses 4.1 and 5.1 of the Deed, the Trustee can determine to pay, apply, allocate or set aside part or parts of the income or capital of the Trust Property, to or for any one or more Beneficiaries 'living or in existence at the time of the determination', in such proportions and manner as the Trustee thinks fit, unless at the time of the determination there is a Distributor in office (see clause 8).
21. Who will benefit, or may be expected to benefit, from the death benefit capital of the Trust, or the income generated by such capital, cannot be determined at the present time, as the potential Beneficiaries encompass a range of individuals and entities, including some not yet in existence. 22. For subsection 302-10(2) of the ITAA 1997 to apply, there needs to be a certainty that death benefits dependants will benefit from the superannuation death benefits in their entirety. 23. As the Trustee may determine who to pay, apply, allocate or set aside the death benefit capital to (subject to them living or being in existence at that time) 'at any time prior to the Vesting Day', there is, at this time, no such certainty, the Vesting Day not having yet been determined. Nor do the terms of the Will or Deed provide any such certainly, in regard to either the capital, or the income generated by that capital. 24. Accordingly, subsection 302-10(3) of the ITAA 1997 applies in this case and the death benefits paid to the Estate should be treated as if being paid to a person who is not a death benefits dependant of the Deceased.