Edited version of private advice

Authorisation Number: 1052091672127

Date of advice: 24 May 2023

Ruling

Subject: Superannuation member benefit or death benefit

Question

Is the full commutation of the Late X (the Member)'s pension phase account to the amount of $X,XXX,XXX that was requested shortly before their death on X XX 2022 but received around 4 weeks after the death on X XX 20XX, a superannuation member benefit or superannuation death benefit?

Answer

The full commutation of the Member's pension phase account was a superannuation member benefit.

This ruling applies for the following period:

Income year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

1.    The member was over 65 years old at the date of their death on X XX 2022 (the Date of Death).

2.    The Member held one superannuation account with their superannuation fund (an APRA fund):

Table 1: Member held one superannuation account

3.    The Member had no death benefits dependants for the purposes of the Income Tax Assessment Act 1997 (ITAA 1997).

4.    The Member lacked legal capacity. As a result, on X XX 20XX the relevant state government authority made an order appointing two of the Member's adult children, joint administrators of the Member's estate (the Administrators). The order gave the Administrators all the powers and duties to make decisions about the financial matters of the represented person specified in the order.

5.    In 20XX the Administrators decided to fully commute the Member's account based pension to fund the Member's ongoing medical and accommodation expenses.

6.    Accordingly, one of the Administrators (the Administrator) completed a withdrawal and account closure form for the Member's account based pension. the Administrator requested payment of the superannuation benefits into the Member's personal bank account.

7.    The Administrator submitted the form to the Member's superannuation fund in the afternoon of the Date of Death and received an acknowledgment email from the fund shortly after that, on that day, before the death of the member.

8.    The Member then unexpectedly died at the night of that day.

9.    The Member's death certificate was issued around two weeks after the Date of Death.

10.  The trustee of the Member's superannuation fund ultimately paid the final withdrawal benefit of $X,XXX,XXX from the Member's pension phase account into the Member's personal bank account around four weeks after the Date of Death.

11.  Probate was granted a few months after the Date of Death.

Relevant legislative provisions

Division 301 of the Income Tax Assessment Act 1997

Division 302 of the Income Tax Assessment Act 1997

Section 307-5 of the Income Tax Assessment Act 1997

Section 307-65 of the Income Tax Assessment Act 1997

Section 307-70 of the Income Tax Assessment Act 1997

Subsection 995-1(1) of the Income Tax Assessment Act 1997

Regulation 307-70.01 of the Income Tax Assessment (1997 Act) Regulations 2021

Regulation 307-70.02 of the Income Tax Assessment (1997 Act) Regulations 2021

Regulation 1.06 of the Superannuation Industry (Supervision) Regulations 1994

Regulation 6.12 of the Superannuation Industry (Supervision) Regulations 1994

Regulation 6.20 of the Superannuation Industry (Supervision) Regulations 1994

Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994

Schedule 1 to the Table in Part 1 of the Superannuation Industry (Supervision) Regulations 1994

Reasons for decision

Release of benefits

Legislative framework

12.  The Member was over 65 years old 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.

13.  The Member's death on X XX 20XX then resulted in their 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

14.  Subsection 995-1(1) of the ITAA 1997 defines 'superannuation benefit' as having the meaning given by section 307-5.

15.  Section 307-5 of the ITAA 1997 states:

307-5(1) A superannuation benefit is a payment described in the table.

Table 2: Types of superannuation benefits

(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.

16.  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.

17.  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.

18.  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

19.  The benefit of $X,XXX,XXX paid from the Member's pension phase 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.

Type of superannuation benefit

Legislative framework

20.  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).

21.  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.)

22.  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.

23.  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:

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

b.    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

24.  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.

25.  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.

26.  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:

a.    the terms of the member's request;

b.    the terms of the trust deed and any other governing rules;

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

d.    the entity that the payment is being paid to;

e.    the circumstances and timing of the payment; and

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

Lump sum benefit of $X,XXX,XXX from pension phase account requested shortly before Member's death on X XX 20XX

27.  At the time the Administrator submitted 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:

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 her benefits (consistent with subregulation 6.20(2) of the SISR); and

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). (The Member was in fact receiving a pension prior to submitting the payment request.)

28.  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.

29.  Considering the facts, at the time of the payment of the lump sum benefit:

a.    We assume that the benefit was paid in accordance with the superannuation fund's trust deed and other governing rules.

b.    The lump sum benefit was 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.

c.     The four-week period between the payment request and receipt of the payment in the Member's personal bank account is a reasonable period for the trustee of the superannuation fund to action the withdrawal, including corroborating the administration order issued by the relevant state government authority and selling down the investments within the Member's pension phase account.

d.    The trustee of the superannuation fund was not aware of the Member's death before it paid the lump sum benefit.

e.    As the trustee was not aware of the Member's death, it processed the payment because of, and consistent with, the Member's request (via the Administrator) on X XX 20XX. In other words, the trustee processed the payment on the basis that the Member was still alive consistent with the cashing rules in regulation 6.20 of the SISR.

30.  Accordingly, it is reasonable to treat the superannuation lump sum benefit of $X,XXX,XXX as a superannuation member benefit. The tax treatment in Division 301 of the ITAA 1997 should apply to the benefit.