Superannuation – tax effectively structuring death benefit payments

The law requires that a member's benefits in a regulated superannuation fund be cashed as soon as practicable after the member dies. If the benefit is paid to the deceased person’s legal personal representative (LPR), the tax treatment may depend not only on who may be expected to benefit from the death benefit, but also on the precise timing of the payment of the benefit.

Current at 1 November 2021

Superannuation – tax effectively structuring death benefit payments

The law requires that a member's benefits in a regulated superannuation fund be cashed as soon as practicable after the member dies. If the benefit is paid to the deceased person’s legal personal representative (LPR), the tax treatment may depend not only on who may be expected to benefit from the death benefit, but also on the precise timing of the payment of the benefit.

Current at 1 November 2021

Section 302-10 of the ITAA 1997 applies where death benefits are paid to the trustee of a deceased estate. It provides that to the extent that one or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit:

  1. the death benefit is treated as if it had been paid to the trustee as a person who was a death benefits dependant of the deceased; (see note 1 below) and,
  2. the benefit is taken to be income to which no beneficiary is presently entitled. 

The provision operates in a similar way to the extent that a beneficiary of the estate is not a death benefits dependant (see note 2 below).

The effect is that no tax will be payable by the LPR to the extent that a tax dependant may be expected to benefit from the death benefit, but tax may be payable at up to 30% depending on the component of the benefit if the payment may be expected to be made to a non-dependant.

The provision does not specify a time when the test about dependants benefiting or expecting to benefit must be satisfied. However, given the reference in paragraph 302-10(2)(b) to present entitlement and link to subsection 101A(3) of the Income Tax Assessment Act 1936 (ITAA 1936), we consider that implicitly the test must be satisfied at the latest by 30 June in the year in which the superannuation proceeds are paid to the trustee of the estate. We have spoken informally to the ATO and they expressed a similar view.

On this view, the timing of the payment of death benefits to the trustee of the estate can be crucial where there is some prospect of a family provision claim being made. Such a claim can be made by a person who the deceased had a responsibility to provide for. A person wishing to make a claim for provision must do so within strict time limits that vary from State to State. In Victoria, this is generally within six months from the date Probate was granted; in Queensland it is generally within nine months from death.

Consider these scenarios ……..

Example 1

The deceased (Bradley) was a resident of Queensland died on 1 May 2019. He was survived by 2 adult children and his (second) wife Beverley. By his Will, Bradley left his entire estate to Beverley if she survived him, but otherwise it was to be divided equally between the children.The deceased had made a binding death benefit nomination in respect of his interest in a superannuation fund, nominating that the proceeds be paid to his legal personal representative.

Superannuation death benefits in the amount of $200,000 were paid to the LPR on 28 June 2019. As at 30 June 2019, no amount had actually been paid to Beverley but it can be argued that as at that date she would be expected to benefit from all of them (as having survived Bradley, she was the sole beneficiary of his estate).

However, the answer may be different if the benefit was paid to the estate in the 2020 income year by which time a claim has been made for family provision. If that claim is not settled before the end of the income year, it is difficult to predict who may benefit from the payment. In these circumstances, it might be safest to assume that the payment will benefit a non-dependant (or seek a ruling from the ATO).

We have seen cases where a Deed has been entered into to settle a family provision claim in the year after the payment of a death benefit which purportedly makes a dependant entitled to the death benefit. We do not think that this can be effective for tax purposes.

Another issue that arises in applying section 302-10 is determining when a person benefits from a death benefit as opposed to some other amount.  A similar issue arises in a different context when applying section 99B of the ITAA 1936 (which exempts certain distributions of trust corpus).  The latter provision was considered by the AAT in Campbell v Commissioner of Taxation {2019} AATA 2043.  The Tribunal found that the trust records were unreliable as evidence and consequently the taxpayer could not show that the relevant distributions fell within the corpus exception.

 

Example 2

Using the previous facts, assume that Bradley’s daughter Bambi made a claim for family provision on 31 July 2019. 

Assume also that the death benefit was paid to the LPR on 1 August and that the LPR was holding $200,000 from the sale of shares that Bradley had owned. 

On 1 December 2019 all relevant parties entered into a Deed, by which it was agreed that Bambi would receive $150,000. The LPR paid Bambi that amount on 10 December 2019.

The test time for section 302-10 purposes is 30 June 2020. 

It is important that the LPR be able to identify which money is used to satisfy Bambi’s entitlement. If the LPR cannot show that Bambi’s payment consists solely of the sale proceeds, then some part of the payment made to her may be regarded as a payment of the death benefit. As Bambi is not a death benefits dependant, the LPR may well be subject to tax (depending on the components of the payment). If it can be shown that all of the death benefit was paid to Beverley, no tax would be payable (regardless of the components) as she is a death benefit dependant. For example, the LPR might consider keeping the death benefit payment in a separate bank account. Alternatively, if Bambi had been paid her entitlement before the death benefit was received by the trustee of the estate, it clearly could not have been a payment of that benefit.

Another issue that arises in applying section 302-10 is determining when a person benefits from a death benefit as opposed to some other amount.  A similar issue arises in a different context when applying section 99B of the ITAA 1936 (which exempts certain distributions of trust corpus).  The latter provision was considered by the AAT in Campbell v Commissioner of Taxation {2019} AATA 2043.  The Tribunal found that the trust records were unreliable as evidence and consequently the taxpayer could not show that the relevant distributions fell within the corpus exception.

Note 1 – Subdivision 302-B of the ITAA 1997 sets out the consequences
Note 2 – Subdivision 302-C of the ITAA 1997 sets out the consequences

 

 

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.