Where a superannuation death benefit is paid to the deceased’s legal personal representative (LPR), the LPR will pay any relevant tax (the death benefit is not taxed according to usual trust taxation rules based on present entitlement to income). (1) Note that the LPR does not pay Medicare levy.
The LPR’s liability is determined having regard to the components of the death benefit and who is to benefit or expected to benefit from it (ie whether a dependant or non-dependant) in the year that is paid to the LPR. (2)
The approach that the ATO took in a recent private ruling (1052099804169) to determining who is expected to benefit from a death benefit caused some angst in the tax practitioner community.
In the relevant case, the estate assets included cash, a dwelling and a death benefit. The intention of the administrator was to pay the entire death benefit to the deceased’s de facto spouse and use other cash, including from the sale of the deceased’s dwelling, to pay court-ordered legacies to the deceased’s adult children.
However, the administrator was obliged to pay the legacies within 28 days of the Court order. At this time, the deceased’s house had not been sold and the only funds available to pay the legacies were from the deceased’s bank account and the superannuation death benefit. It was clear that some of the death benefit had been paid to non-dependants of the deceased, and accordingly was taxable.
Interestingly however in determining the extent to which the death benefits were paid to non-dependants, the Commissioner adopted an approach which had regard to the total value of the residuary estate (paragraphs 30 and 31).
While this produced a result that was favourable to the rulees in this case, it was at odds with general industry practice which is to trace the death benefit without reference to the value of the residue.
We note that the private ruling has since been annotated to the effect that it may be misleading and may not represent the ATO view.
(1) section 101A of the ITAA 1936
(2) section 302-10 of the ITAA 1977
Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.
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