Edited version of private advice

Authorisation Number: 1052179436983

Date of advice: 10 November 2023

Ruling

Subject: Superannuation member benefit or death benefit

Question

Is the payment of $xxx,xxx.xx, requested shortly before the Member's death, but paid after their death in a series of lump sum payments in the period xx/xx 2020 to xx/xx 2021, a superannuation member benefit under subsection 307-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)??

Summary

No, the payment from the Member's account is a superannuation death benefit under subsection 307-5(4) of the ITAA 1997.

Relevant Facts and Circumstances

The Member's date of birth is xx/xx 1933.

The Member passed away on xx/xx 2020.

The Member was a member of a self managed superannuation fund (the Fund).

The Trustee of the Fund is a corporate trustee.

In an email dated xx/xx 2020, the Fund's financial planner emailed the Power of Attorney for the Member, recommending that the existing assets of the Fund be converted to cash and the Fund be wound up.

In an email dated xx/xx 2020, the Power of Attorney responded in agreement.

On xx/xx 2020 and xx/xx 2020, the Fund's financial planner applied for redemption of the bulk of the Fund's managed investments.

The Member was XX years old at the time of this request.

On xx/xx 2020, the redemption proceeds began to be received into the Fund's cash account.

The lump-sum payments, totalling $xxx,xxx.xx, were withdrawn from the Fund's cash account as follows:

•         xx/xx 2020: $xxx,xxx

•         xx/xx 2020: $xxx,xxx

•         xx/xx 2020: $xxx,xxx

•         xx/xx 2020: $xxx,xxx

•         xx/xx 2020: $xxx,xxx

•         xx/xx 2021: $xx,xxx.xx

The payments were received into the Member's personal bank account.

In an email dated xx/xx 2023, the executor of the Member's deceased estate, stated that the distributions had been paid in increments because there was a daily banking limit.

On xx/xx 2016, the Member had signed a Binding Death Benefit Nomination form, requesting that their benefits in the Fund be distributed equally between their five children.

Minutes of a Fund meeting held by the Directors of the Trustee for the 2021 income year show that the Member's benefits were paid out as follows:

•         Beneficiary 1: $xxx,xxx.xx

•         Beneficiary 2: $xxx,xxx.xx

•         Beneficiary 3: $xxx,xxx.xx

•         Beneficiary 4: $xxx,xxx.xx

•         Beneficiary 5: $xxx,xxx.xx

The Statement of Financial Position for the Fund, as at xx/xx 2021, shows a lump sum payment to the Member in the amount of $xxx,xxx.

Minutes of a Fund meeting held by the Directors of the Trustee for the 2021 income year state that the Fund was wound up on xx/xx 2021.

In an email dated xx/xx 2023, the Fund's tax agent stated that the Fund's financial planner had retired and so would not be able to provide information regarding whether they had knowledge of the Member's passing prior to the payments being made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 301

Income Tax Assessment Act 1997 Division 302

Income Tax Assessment Act 1997 Section 307-5

Income Tax Assessment Act 1997 Section 307-65

Income Tax Assessment Act 1997 Section 307-70

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

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

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

Superannuation Industry (Supervision) Regulations 1994 Regulation 1.06

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.12

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.20

Superannuation Industry (Supervision) Regulations 1994 Regulation 6.21

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

Detailed reasoning

Release of benefits

Legislative framework

The Member was XX 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 XX 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.

The Member's death on xx/xx 2020 then resulted in them 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

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

Section 307-5 of the ITAA 1997 states:

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

(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.

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.

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.

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

The benefit of $xxx,xxx requested to be paid shortly before the Member's death on xx/xx 2020 but paid from the Member's account after their death in a series of lump sum payments, is a superannuation lump sum. This is a straightforward application of subsection 307-65(1) ITAA 1997.

Type of superannuation benefit

Legislative framework

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).

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.)

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.

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:

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

•         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

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.

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 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.

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:

•         the terms of the member's request;

•         the terms of the trust deed and any other governing rules;

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

•         the entity that the payment is being paid to;

•         the circumstances and timing of the payment; and

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

Lump sum benefit

At the time the Member 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:

•         voluntarily cash their benefits at any time (consistent with subregulation 6.20(1) of the SISR);

•         cash the whole or a part of their benefits (consistent with subregulation 6.20(2) of the SISR); and

•         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 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.

To determine whether the superannuation payment is a member benefit or a death benefit, the following factors must be considered:

•         The Member requested, via their enduring Power of Attorney, that their benefits in the Fund be paid out as a lump sum into their personal bank account.

•         The Member was XX years old in 2020, and had retired, so would have satisfied either item 101 or 106 in the table in Schedule 1 of the SISR, which would have entitled them to either cash out the entirety of their benefits at their discretion, or required them to cash their benefits out as soon as practicable, depending on whether the superannuation payment was determined to be a member benefit or a death benefit.

•         Clause xx.x of the Fund's Trust Deed allowed the Member to withdraw her superannuation benefit where they satisfied a condition of release, and sub-clause xx.xx.x stated that this benefit could be paid out as a lump sum.

•         The Director of the Corporate Trustee is both the Member's son and the Member's enduring Power of Attorney, and so would have had immediate knowledge of the Member's passing.

•         The distributions were paid into the Member's personal bank account, as per the Member's instructions.

The difficulty lies in the timing of the redemption proceeds into the Fund's bank account, and the payment of the distributions into the Member's bank account:

•         Approval was granted by the Member's son, as enduring Power of Attorney for the Member, to convert the assets into cash and pay the lump sum benefit to the Member on Friday xx/xx 2020.

•         The bank statements show that the Fund's financial planner commenced the redemption process for the Fund's managed investments on xx/xx and xx/xx, which was the Tuesday and Wednesday of the next week.

•         The Fund started receiving these redemption proceeds into the Fund's bank account on Friday xx/xx 2020.

•         The Member passed away on Saturday xx/xx 2020.

•         The first payment was made on Monday xx/xx 2020.

Therefore, the payments were made by the Fund's financial planner on the first business day after the Member had passed. Additionally, no information has been provided to determine the Fund's financial planner's level of knowledge concerning the Member's passing, at the time the payments were made.

Nevertheless, the paramount consideration is that all of the payments were made after the Member's death, with the Trustee's knowledge that the Member had passed.

Therefore, the payment of $xxx,xxx, consisting of lump sum payments of mostly $xxx,xxx increments, paid into the Member's bank account commencing on xx/xx 2020 and ceasing on xx/xx 2021, is a superannuation death benefit. The tax treatment in Division 302 of the ITAA 1997 should apply to the benefit.