Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 4 Taxation of superannuation death benefits to non-dependants of defence personnel and police killed in the line of duty
Outline of chapter
4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to align the tax treatment of lump sum superannuation death benefits paid to non-dependants with that applying to dependants where the deceased was killed in the line of duty as a member of either the Australian Defence Force (ADF), or any Australian police force, or as an Australian Protective Service Officer.
Context of amendments
4.2 Superannuation death benefits paid to dependants of a deceased person are taxed more concessionally than if they are paid to non-dependants.
4.3 From 1 July 2007, lump sum superannuation death benefits will be tax-free without limit if paid to dependants and taxed concessionally if paid to non-dependants, as a result of the introduction of the Simplified Superannuation reforms.
4.4 This means that non-dependant beneficiaries of defence personnel and police, such as parents and siblings, pay a higher rate of tax on lump sum superannuation death benefits than dependant beneficiaries, such as spouses.
Summary of new law
4.5 Schedule 4 allows non-dependants of ADF personnel, Australian police force members or Australian Protective Service Officers who die in the line of duty to be treated as death benefits dependants for tax purposes.
4.6 The Minister for Revenue and Assistant Treasurer announced in Press Release No. 032 of 5 April 2007 that non-dependants of ADF personnel, Australian Federal Police (AFP), including Australian Protective Service Officers, and state and territory police killed in the line of duty (or as a result of injuries sustained in the line of duty) would receive access to the same concessional tax treatment for lump sum superannuation death benefits as dependants, with effect from 1 January 1999.
4.7 These amendments recognise the valuable role played by defence personnel and police in maintaining the safety and security of the community and the country.
4.8 These amendments take effect from the 2007-08 income year.
4.9 The legislation recognises that the making of ex gratia payments in relation to lump sum superannuation death benefits received in income years prior to the 2007-08 income year by non-dependants of ADF personnel, Australian police force members and Australian Protective Service Officers who died in the line of duty is an appropriate exercise of the Executive Power of the Commonwealth. The Commissioner of Taxation (Commissioner) will make these payments on behalf of the Commonwealth.
Comparison of key features of new law and current law
| New law | Current law |
| Non-dependants of the members of the ADF, the AFP, state and territory police and Australian Protective Service Officers killed in the line of duty are treated as dependants. This means that from 1 July 2007, they will pay no tax on lump sum superannuation death benefits. | From 1 July 2007, non-dependants of the members of the ADF, the AFP, state and territory police and Australian Protective Service Officers killed in the line of duty pay tax at 15 per cent on lump sum superannuation death benefits if paid from a taxed fund or 30 per cent if paid from an untaxed fund. |
Detailed explanation of new law
4.10 A superannuation death benefit is a superannuation benefit that is paid as the result of the death of another person.
4.11 Superannuation death benefits paid to dependants of a deceased person are taxed more concessionally than if they are paid to non-dependants.
4.12 Death benefits dependant is defined in the legislation as the deceased's spouse or former spouse, the deceased's child aged less than 18, any person with whom the deceased had an interdependency relationship just before he or she died, or any other person who was a dependant of the deceased person just before he or she died.
4.13 As a result of the Simplified Superannuation reforms, from 1 July 2007 superannuation death benefits will be tax-free without limit if paid to dependants and taxed concessionally if paid to non-dependants (at 15 per cent if paid from a taxed fund and at 30 per cent if paid from an untaxed fund).
4.14 Where a non-dependant receives a lump sum superannuation death benefit in respect of the death in the line of duty, either within or outside Australia, of a member of the ADF, the AFP, a state or territory police force or an Australian Protective Service Officer, the payment is taxed as though it were paid to a dependant of the deceased. [Schedule 4, item 2, subsection 302-195(2 )]
4.15 Circumstances that constitute an individual being killed in the line of duty will be set out in regulations. The circumstances of the death must be covered in the regulations in order for the deceased's non-dependant beneficiaries to qualify for the same tax treatment as a dependant. [Schedule 4, item 2, subsection 302-195(3 )]
4.16 It is intended that the regulations will cover circumstances that are both included and excluded from the definition of 'died in the line of duty'. Excluded circumstances, such as suicide, would override included circumstances, such as participation in an overseas deployment. The intended application will be covered in more detail in the explanatory statement to the regulations.
4.17 In line with the normal record keeping requirements, claimants are required to retain proof of the circumstances surrounding the death. For example, this may take the form of a death certificate, letter from the deceased's employer or a coroner's report.
Ex gratia payments
4.18 Ex gratia payments are considered to be the most effective mechanism to achieve a similar outcome for the non-dependants of ADF personnel, AFP members, Australian Protective Service Officers, and state and territory police force members killed in the line of duty who have received a lump sum superannuation death benefit over the period from 1 January 1999 to 30 June 2007.
4.19 This approach avoids the need to seek an amended tax assessment of the deceased estate, which would be required if the legislation was amended retrospectively.
4.20 The calculation of the ex gratia payments shall be based on the tax treatment that applied at the time the lump sum superannuation death benefit was received. This will ensure that eligible non-dependants achieve a similar outcome to that of a dependant who received a lump sum superannuation death benefit at the same time. For payments received prior to 1 July 2007, lump sum superannuation death benefits paid to dependants were tax-free up to the reasonable benefit limit.
4.21 Ex gratia payments will be made as an exercise of the Executive Power of the Commonwealth and these arrangements will be administered by the Commissioner.
4.22 This is an appropriate exercise of the Executive Power, even though the legislative amendments will apply prospectively. [Schedule 4, item 5]
4.23 Individuals may need to provide substantiating documentation to the Australian Taxation Office (ATO), such as proof of tax paid and the circumstances surrounding death, as part of the assessment process for an ex gratia payment.
4.24 Based on information provided by the individual, the ATO shall apply the circumstances of death to the exhaustive list in the regulations to determine whether a non-dependant beneficiary is eligible for a payment.
Application provisions
4.25 These amendments apply to lump sum superannuation death benefit payments received in the 2007-08 income year and later income years. [Schedule 4, item 4]
Consequential amendments
4.26 The numbering of section 302-195 is changed to reflect the inclusion of a subsection on eligibility for treatment as a 'death benefits dependant'. [Schedule 4, item 1]
4.27 A definition of 'died in the line of duty' is inserted into the Dictionary in Division 995 of the ITAA 1997. [Schedule 4, item 3, definition of 'died in the line of duty' in subsection 995-1(1 )]