Tax treatment of super death benefits paid to trustee explained in PBR

The ruling (1052503275310) concerned the superannuation of the deceased who was survived by two children, A and B, both under the age of 18 at the date of the deceased passing.

A trustee was appointed as the executor and trustee of the estate and was granted probate of the last will and testament.

X

Continue to Website

The will provided that the net residue of the estate was to be divided equally between two discretionary testamentary trusts created by the will – C and D trust – for the two beneficiaries.

Whilst the beneficiaries of each of the trusts were defined broadly in the will, the instrument provided that the trustee had the discretion to pay all or part of the income and all or part of the capital of the testamentary trusts they thought fit.

The tribunal heard the deceased was a member of a superannuation fund on the date of their death and a superannuation lump sum death benefit became payable by the fund to the estate.

On the same day, the trustee executed deeds of segregation to segregate the capital of the death benefit which each of the trusts was to receive from the estate as a separate pool of asset

In addition, prior to the receipt of the death benefit the estate had set up a dedicated bank account for the purposes of receiving and segregating the death benefit to be received from the fund.

The death benefit was paid by the fund to the dedicated bank account of the estate so that there was no inter-mingling of it with any other monies. It was also divided into two equal shares which were transferred from the estate’s bank account to each of the dedicated accounts set up by the trustee for both the C and D trust.

In its reasoning the tribunal stated that the payment is 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).

“Section 302-10 of the ITAA 1997 deals with superannuation death benefits paid to trustee of deceased estate,” the ATO’s ruling said. 

“Subsection 302-10(1) of the ITAA 1997 states 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 intended to benefit from the estate. The provision operates to provide the same tax treatment that would apply where the beneficiary receives the death benefit directly.”

It continued that if there was more than one beneficiary of the estate who were death benefits dependants, or may be expected to benefit, from the superannuation death benefit, it is treated as if it had been paid to “you as a person who was a death benefits dependant of the deceased; and the benefit is taken to be income to which no beneficiary is presently entitled.”

“This means that where a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it was paid to a dependant of the deceased, and the benefit is taken to be income to which no beneficiary is presently entitled,” the ruling stated.

If more than one beneficiary were not death benefits dependants and benefited, or may have expected to benefit, from the superannuation death benefit 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 the benefit is taken to be income to which no beneficiary is presently entitled”.

“Accordingly, where a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased to that extent, and the benefit is taken to be income to which no beneficiary is presently entitled,” the ruling said.

Where death benefits are paid from an estate into a testamentary trust established under a will, the trustee of the 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 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,” it said.

“In this case, the effect of the resolution and the deeds was that all of (the capital of) the death benefits received by the trustee of the estate from the fund are distributed equally and held solely for the benefit of A in the case of the C Trust and B in the case of the D Trust. Therefore, A and B are the respective beneficiary expected to benefit from the death benefits.”

The ruling said a superannuation lump sum received because of the death of a person of whom you are a death benefits dependant is not assessable income and is not exempt income. Therefore, in this case, the death benefits are not assessable income and are not exempt income to the trustee, where it is taken to be income to which no beneficiary is presently entitled.