Michael Hallinan, special counsel for SUPERCentral, said a recent private binding ruling (PBR) once again deals with the complicated issue of death benefit nominations and tax payable,
In this ruling, the commissioner had to consider the situation of what tax consequences could be applied where a spouse, who was a death benefit nominee, died after the member but before the entitlement to the death benefit arose.
“The ruling related to the situation where the deceased member had two discrete superannuation interests in the fund – one interest was subject to a non-binding death benefit nomination and there was no death benefit nomination in relation to the other interest,” Hallinan said.
“The deceased’s will had a 30-day survivorship provision which stipulated that the spouse was only entitled to the estate if they survived the deceased by 30 days or more. The will provided that in the event of the spouse not surviving 30 days, the estate was allocated to the children of the deceased and the spouse in equal shares.”
Hallinan said as there was no binding nomination, the rules of the superannuation fund conferred a discretion on the trustee to allocate the death benefit (in such proportions as the trustee determined) to or among the eligible beneficiaries of the deceased.
“In this case, the eligible beneficiaries were the spouse of the deceased, the two adult children of the deceased, and the estate of the deceased,” he said.
“After the member died but before the trustee exercised its discretion, the spouse died. As the discretion had not been exercised by the time of the spouse’s death, no entitlement to the death benefit was in existence.”
He added that, consequently, the trustee could not allocate the death benefit to the deceased spouse, and the trustee could not allocate the death benefit to the estate of the deceased spouse as this estate was not an eligible beneficiary – only the estate of the deceased member was an eligible beneficiary.
“The trustee then exercised their discretion to allocate the death benefit to the estate of the deceased member. Consequently, the death benefit was paid to the estate. At the time the benefit was paid, no taxation deductions had been made by the trustee,” Hallinan said.
The question considered by the ruling was whether the benefit should be treated by the executor of the estate of the deceased member as a superannuation death benefit that would be subject to 15 per cent on the taxable component of the payment, or whether the taxable component was not subject to tax.
“If it could be argued that the spouse had an entitlement under the will to the benefit, then there would be no tax. Unfortunately, as the will had a 30-day survivorship clause, and as the spouse died within the 30-day period, the spouse or the estate of the spouse had no entitlement,” Hallinan said.
“As the spouse had no entitlement, the estate was payable to the adult children in equal shares, and the taxable portion of the death benefit was liable to 15 per cent tax.
“If the will did not have a 30-day survivorship period, the spouse is entitled to the whole of the estate of the deceased member. This entitlement arises at, and by reason of, the death of the deceased member.”
He continued that assuming the death benefit is paid to the executor of the estate before the death of the spouse, the executor would be in a position to determine that the spouse will be expected to benefit from the death benefit.
“Consequently, the death benefit is treated for taxation purposes as if the executor of the estate was a death benefits dependant and is treated as not being taxable in the hands of the executor,” Hallinan said.
Based on the reasoning of a 2021 PBR, he said, the same result would be applied if the death benefit is paid to the executor of the estate of the deceased member after the death of the spouse.
“In this case, the death benefit will be paid from the executor of the member’s estate to the executor of the spouse’s estate. The death benefit is still to be treated, in the hands of the executor of the member’s estate, as if the benefit had been paid to the spouse,” he said.
“Consequently, the death benefit in the hands of the executor of the member’s estate would be tax-free, and they will be required to pay the death benefit to the executor of the spouse’s estate.”
Alternatively, Hallinan said, if there had been binding nominations in favour of the spouse, and assuming the BDBN is valid, then on the death of the member, the nomination takes effect and the spouse has an accrued entitlement to the death benefit.
“In this situation, so long as the spouse has survived the deceased member, the accrued entitlement is a presently existing liability of the fund in favour of the spouse, which liability will be discharged by the payment of the death benefit to the spouse,” he said.
“If the spouse dies before payment is effected, then the payment will be paid to the executor of the spouse’s estate and, for taxation purposes, will be treated as if the payment had been paid to the spouse. As the spouse was a death benefit dependant of the member, the payment in the hands of the executor for the spouse will be tax-free.”
Hallinan said it is generally better to have death benefits paid directly to the intended beneficiary rather than indirectly via the estate of the deceased member via a BDBN or by a very timely exercise of the trustee’s allocation power.
“If the death benefit is allocated by a BDBN, the intended beneficiary, in this situation the spouse, must survive the deceased member,” he said.
“If the death benefit is allocated by the exercise of the trustee’s discretion, the intended beneficiary must survive until the discretion is exercised.”
