Edited version of your written advice

Authorisation Number: 1012855423342

Date of advice: 6 August 2015

Ruling

Subject: Trust - budget repair levy

Question 1

Will the trustee of the deceased estate be liable for the budget repair levy?

Answer

Yes

Question 2

Will the budget repair levy rate of 2% be applied in addition to the superannuation lump sum tax offset?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

You have been appointed as executor/administrator of the deceased's estate.

For the 2014-15 income year, the net income of the trust estate was more than $180,000.

There were no beneficiaries presently entitled to the income of the trust estate.

The taxable income of the deceased's estate in the 2014-15 income year is made up of ETP and a superannuation lump sum.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99

Income Tax Assessment Act 1936 Paragraph 251S(1)(c)

Income Tax (Transitional Provisions) Act 1997 Section 4-11

Income Tax Assessment Act 1997 Section 82-65

Income Tax Assessment Act 1997 Section 82-70

Income Tax Assessment Act 1997 Section 82-75

Income Tax Assessment Act 1997 Section 302-10

Income Tax Assessment Act 1997 Section 302-60

Income Tax Assessment Act 1997 Section 302-140.

Income Tax Assessment Act 1997 Section 302-145.

Reasons for decision

Issue 1 - Budget repair levy

As part of the 2014-15 Federal budget the Government introduced a Temporary Budget Repair Levy.

The levy applies to the 2014-15, 2015-16 and 2016-17 income years. Section 4-11 of the Income Tax (Transitional Provisions) Act 1997 provides that the levy will be payable if:

• you are an individual; and

• your taxable income for the corresponding income year exceeds $180,000.

However the note in section 4-11 of the Income Tax (Transitional Provisions) Act 1997 also states that the levy will apply to some trustees who are taxed as if certain trust income were income of individuals (such as under sections 98 and 99 of the Income Tax Assessment Act 1936 (ITAA 1936)).

The levy is payable at a rate of two per cent of each dollar of a taxpayer's taxable income over $180,000.

In this case, as no beneficiaries were presently entitled to the trust income, the trustee of the deceased estate will be assessed under section 99 of the ITAA 1936. Section 99 of the ITAA 1936 operates to assess the trustee as if they were an individual (with the benefit of the tax free threshold where the deceased died less than three years before the end of the income year).

As the trustee of the deceased estate will be taxed as if they were an individual, the budget repair levy will apply as per section 4-11 of the Income Tax (Transitional Provisions) Act 1997.

Further issues to consider

During the relevant years, the budget repair levy will apply to trustees of deceased estates assessed under section 99 of the ITAA 1936 (where the taxable income exceeds $180,000) regardless of the age of the estate.

Issue 2 - Superannuation lump sum tax offset

Death benefit termination payment

A death benefit termination payment is an employment termination payment (ETP) received by a person after another person's death in consequence of termination of the deceased person's employment.

Where a death benefit termination payment is made to a trust estate, section 82-5 of the Income Tax Assessment Act 1997 (ITAA 1997) taxes the payment in the hands of the trustee in the same way as if it were paid directly to the beneficiaries. However, section 82-75 also treats the payment as income to which no beneficiary is presently entitled. As such, the tax treatment is determined by the dependency status of the intended beneficiaries together with the rules that govern deceased estates, in particular income to which no beneficiary is presently entitled.

Under subsections 82-65(1) and 82-70(1) of the ITAA 1997, regardless of whether the recipient is a dependant or non-dependant the tax-free component will be tax-free. However, the taxable component attracts different rates of tax.

Where the intended beneficiary is a dependant of the deceased, the amount of the taxable component up to the ETP cap of $185,000 (2014-15 income year) is tax-free and the amount in excess of $185,000 is taxed at the top marginal tax rate of 45%.

If a payment is paid directly to a beneficiary, Medicare levy would be added to the top marginal tax rate making it 47%. However, as section 82-75 of the ITAA 1997 stipulates that the payment is also taken to be income to which no beneficiary is presently entitled, the trustee is taxed under section 99 of the Income Tax Assessment Act 1936 (ITAA 1936). Where the trustee is liable for any tax payable, no Medicare levy is charged as deceased estates are excluded from Medicare levy under paragraph 251S(1)(c) of the ITAA 1936.

Whilst no Medicare levy is charged, income assessed under section 99 of the ITAA 1936 will attract the Temporary Budget Repair Levy of 2% for estate income over $180,000 from 1 July 2014 to 30 June 2017 making the effective rate 47% for incomes over $180,000.

Where the intended beneficiary is a non-dependant of the deceased, the amount of the taxable component up to the ETP cap of $185,000 (2014-15 income year) is taxed at 30% and the amount in excess of $185,000 is taxed at the top marginal tax rate of 45%. Ordinary Medicare levy of 2% would be added to these tax rates however as stated earlier, deceased estates are excluded from the Medicare levy.

Again, any estate income in excess of $180,000 that is taxed under section 99 of the ITAA 1997 attracts the Temporary Budget Repair Levy of 2% which applies from 1 July 2014 to 30 June 2017. Therefore the tax rate for income intended for non-dependants over $180,000 will be 47% for these years.

Superannuation death benefits

A superannuation death benefit is a payment made from a superannuation fund after a person's death because that person was a fund member.

Similar to death benefit termination payments, section 302-10 of the ITAA 1997 taxes the superannuation death benefit in the hands of the trustee in the same way as if it were paid directly to the beneficiaries and treats the payment as income to which no beneficiary is presently entitled.

If the lump sum superannuation death benefit will be distributed to a dependant beneficiary, the entire amount is tax-free under section 302-60 of the ITAA 1997.

Where the lump sum will be distributed to a non-dependant beneficiary, the tax-free component is tax-free under section 302-140 of the ITAA 1997 and the taxable component is assessable income and taxed at marginal rates under subsection 302-145(1) of the ITAA 1997.

However, for the amounts representing the taxed element of the taxable component, a tax offset is available to ensure the rate of tax does not exceed 15% (subsection 302-145(2) of the ITAA 1997). Similarly, a tax offset is available on amounts representing the untaxed element to ensure the rate of tax does not exceed 30% (subsection 302-145(3) of the ITAA 1997). As addressed previously, deceased estates are not subject to Medicare levy under paragraph 251S(1)(c) of the ITAA 1936.

However, as with death benefit termination payments, any estate income in excess of $180,000 that is taxed under section 99 of the ITAA 1997 is subject to the Temporary Budget Repair Levy of 2% from 1 July 2014 to 30 June 2017. Accordingly the Temporary Budget Repair Levy of 2% is additional to the tax offsets available under subsections 302-145)(2) and 302-145(3) of the ITAA 1997.

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