Lump sum benefit after death ruling clarifies ATO’s position
Another recent PBR has clarified the conditions required for a lump sum payment requested shortly before the death of a member but received after their death to be considered a superannuation member benefit.
The private binding ruling (7915169902780) dealt with a member who held one pension phase superannuation account with an APRA-regulated public fund at the time of his passing. He had no death benefit dependants for the purposes of the Income Tax Assessment Act 1997.
The member had signed a withdrawal payment or rollover request form asking for a full lump sum payment (account closure) and provided the fund with the legal representative's contact details. The fund contacted the LPR advising that instructions to process the withdrawal to the member's pension payment bank account were received and "passed on".
The fund then sent a letter to the member confirming that the withdrawal request had been processed following the member's instructions, and an exit statement was provided.
Following the member’s death, the commissioner requested from the LPR evidence of the fund trustee's knowledge of the death of the member at the time the payment was made. The LPR sent an email to the member’s bank to request details of the two payments made on the specified date.
The bank sent a letter to the LPR stating it had investigated the inquiry and found that the funds were both received by the bank on the specified date. The fund sent an email to the LPR stating that the "fund was never aware that the member was deceased which means the payment would have always been a withdrawal. This is confirmed by the trustee".
The email stated that the trustee at the time was still investigating the dates. This is evidence that the trustee of the fund was not aware that the member had died when the payment was made.
The product disclosure statement and additional information guide, both dated 1 December 2023, were provided to the tribunal, but these did not include the trust deed or governing rules of the fund.
The tribunal ruled that at the time of death, 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 or as an interim and final lump sum 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.
It continued that a superannuation lump sum is a superannuation benefit that is not a superannuation income stream benefit.
“The benefit paid from the member's account as requested shortly before their death, but received in their bank account after their death is a superannuation lump sum. This is a straightforward application of subsection 307-65(1) ITAA 1997,” it read.
“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).”
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 ruling read.
“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.”
Furthermore, it said that at the time the member submitted the payment request, they had already satisfied a “nil” condition of release and their superannuation benefits had been converted to unrestricted non-preserved benefits.
For this reason, the member was 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).
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).
“Considering the facts, at the time of the payment of the lump sum benefit we assume that the benefit was paid in accordance with the superannuation fund's trust deed and governing rules and 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,” the ruling added.
“No evidence was provided to explain the 14-day delay of the lump sum payment date which is shown in documents submitted from the fund and the actual payment date shown on the member's bank statement. The fund's trustee was not aware of the member's death at the time of payment, confirmed by email.”
The tribunal ruled that the date the fund reported to the ATO that the account was closed matches the date the amount was received in the member's bank account.
“The fund confirmed by email that the member had taken the account balance and exited the fund on the specified date. If the payment and closure of the account had begun on this date, it may have been difficult for the fund to have changed the payment if they had received information about the member's death.”
“Accordingly, it is reasonable to treat the total superannuation lump sum benefit as a superannuation member benefit. The tax treatment in Division 301 of the ITAA 1997 should apply to the benefit.”