Immigrants to Australia will often have had superannuation or pension funds accumulated for them in their country of origin during the years in which they worked in those countries, and many of these funds may pay a lump sum payment upon the death of the member.
The deceased person’s legal personal representative (LPR) or beneficiary of their estate (where the payment is paid directly to them) must consider the Australian income tax consequences from the payment.
Foreign superannuation funds are not resident regulated Australian superannuation funds and accordingly are classified as non-complying superannuation funds. Consequently, a payment is not tax-free in Australia even when paid to a dependent of the deceased, and even if it is not subject to tax in the overseas country.
Subdivision 305-B of the ITAA 1997 sets out the tax treatment of benefits received by members of non-complying plans, including foreign superannuation funds. This treatment varies depending on whether the payment is made within six months of the member becoming an Australian resident.
Where the payment is received within six months, it will generally be treated as non-assessable non-exempt income if the conditions in section 305-60 of the ITAA 1997 are satisfied.
If the payment is received more than six months after the deceased person became an Australian resident, section 305-70 of the ITAA 1997 brings the applicable fund earnings to tax.
Subsection 305-75(3) states that if a person became an Australian resident after the start of the period to which the lump sum relates, the amount of their applicable fund earnings is the amount (not less than zero) worked out as follows;
(a) Calculate the total of the following amounts:
- (i) The amount in the fund that was vested in you just prior to the day you first became an Australian resident during the period;
- (ii) The part of the payment that is attributable to contributions to the fund made by or in respect to you during the remainder of the period;
- (iii) The part of the payment (if any) that is attributable to amounts transferred into the fund from any other foreign superannuation fund during the period;
(b) Subtract that total amount from the amount in the fund that was vested in you when the lump sum was paid (before any deduction for foreign tax);
(c) Multiply the resulting amount by the proportion of the total days during the period when you were an Australian resident;
(d) Add the total of all previously exempt fund earnings (if any) covered by sub-s (5) and (6).
From a deceased estate’s perspective, where the LPR receives an amount which would have been ordinarily assessable in the hands of the deceased had they received the payment prior to death, such payment should be included as assessable income within the estate income tax return.  The amount is deemed to be income to which no beneficiary is presently entitled, and therefore assessable to the LPR.  If the payment is made directly to a dependant, it will be assessable to them.
The applicable fund earnings are subject to tax at the person’s (or estate’s) marginal tax rate and the remainder of the lump sum payment will not be assessable income.
 ITAA 1936 s 101A(1).  Ibid.
- Tom worked for an international company overseas. He and his family migrated to Australia in the 2013 income year.
- Tom died in 2017 leaving behind a widow; Mary, and two minor children. Tom, prior to his death, was a member of an overseas superannuation fund and did not withdraw any amount within 6 months of his move to Australia.
- No further contributions had been made into his overseas fund since Tom’s move to Australia.
- Upon being notified of Tom’s death, the overseas fund paid a lump sum death benefit to Mary as the designated beneficiary.
- The overseas government has not deducted any tax from the lump sum death benefit.Australian tax implications
- As Mary received the lump sum benefit in 2017, it is more than 6 months after Tom had become an Australian resident. Accordingly, a portion of the lump sum will be assessable.
- Mary will be assessed only on the increase in value of Tom’s entitlement in the superannuation fund since 2013.
- Mary must declare the amount in her personal tax return as the payment had been made directly to her.
Note: In contrast, a lump sum death benefit payment from a complying Australian superannuation fund would be tax-free to Mary as she is a dependant.
Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.
This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning. Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.