The Rulings respond to a number of issues raised by the Financial Services Council (FSC) through the National Tax Liaison Group - Super Technical sub-group (NTLG).
In response to the concerns raised by the FSC, the Rulings clarify:
- the appropriate tax treatment of benefits paid to certain beneficiaries after a fund member's death; and
- the trustee's obligation in certain circumstances to determine whether a beneficiary child has a prescribed disability when they turn 25.
Who do the rulings affect?
The Rulings generally impact the taxation treatment on death benefit payments and consequently affect:
- recipients of death benefits; and
- SMSF trustees making death benefit payments.
Taxation Determination TD 2013/10 - application of a deceased member's benefits to commence a superannuation income stream
In TD 2013/10, the ATO confirms that the application of a deceased member's benefits in a regulated superannuation fund to commence a pension from the deceased member's fund is not a transfer of an amount between superannuation interests in that fund for the purposes of section 307-5(8) of the Income Tax Assessment Act 1997 (ITAA97).
The FSC was concerned there was a risk that where one or more 'pension dependants' (see our Clearlaw article here for a definition of a pension dependant) commenced a pension from the proceeds of the deceased member's death benefits, the amount applied to commence the pension may not be tax-free and may actually be considered a contribution.
TD 2013/10 provides comfort to 'pension dependants' who elect to commence a pension that they will not be assessed on the receipt of the assets used to purchase their pension.
Neither this Ruling nor any of the recent Rulings affect the way in which the pension itself will be taxed. Taxation of the pension itself will depend on matters including:
- the age of the dependant; and
- the age of the deceased member when they died.
Taxation Determination TD 2013/11 - payment of a deceased member's benefits from one fund to another for immediate cashing
In TD 2013/11, the ATO confirms that the payment of all or part of a deceased member's benefits in a regulated superannuation fund from that fund to another fund, so that the deceased member's beneficiary may immediately cash those benefits, is not a 'roll-over superannuation benefit' as defined in section 306-10 of the ITAA97.
Practically, TD 2013/10 confirms that where a trustee (usually at the beneficiary's direction) distributes a deceased member's benefits by paying a lump sum to another fund, such amount will be liable for tax in the same way as other lump sum payments and will not qualify as a 'roll-over superannuation benefit'.
Taxation Determination TD 2013/12 - payment of a superannuation lump sum to a deceased member's child
In TD 2013/11, the ATO confirms that a deceased member's child will satisfy the definition of a death benefits dependant for the purposes of section 302-195(1) of the ITAA97, where the child is aged less than 18 just before the member died.
Prior to this Ruling, there was uncertainty as to whether a child of a deceased member must be aged under 18 at the time they received a superannuation lump sum in order for that child to qualify as a death benefits dependant. The uncertainty arose as subsection 302-195(1) of ITAA97 does not explicitly state when the age of the relevant child should be assessed.
The ATO has now made clear that the appropriate assessment should be made consistently with the assessment for other dependants defined in subsection 302-195(1), being just before the relevant person dies.
In practice, TD 2013/11 confirms a lump sum death benefit payment made to a child of a deceased member will be tax-free even if the child is aged 18 or over when they receive the lump sum payment, provided they were under 18 when the member died.
Taxation Determination TD 2013/13 - payment of a superannuation lump sum from one fund to another (spouse payments)
In TD 2013/13, the ATO confirms that the payment of all or part of a deceased member's benefits in a complying superannuation fund arising from the full commutation of a pension, when paid from that fund to another complying fund, is a 'roll-over superannuation benefit' as defined in section 306-10 of the ITAA97 in certain circumstances.
The payment of the lump sum will only qualify as a 'roll-over superannuation benefit' where:
- the recipient was the deceased member's spouse at the time of the deceased member's death;
the lump sum is paid after the latest of:
- 6 months after the death of the deceased person;
- 3 months after the grant of probate or letters of administration of that deceased person's estate;
- if the payment is delayed due to legal action about the entitlement to the payment, 6 months after the legal action ceases; and
- if the payment is delayed due to reasonable delays in the process of identifying and making initial contact with potential recipients, 6 months after that process is completed, and
- the Commissioner of Taxation has not made a decision under subsection 307-5(3A) of the ITAA97 that the lump sum is not a 'superannuation member benefit' under section 307-3(5).
In practice, TD 2013/13 confirms a superannuation lump sum paid to a spouse in the above circumstances will be tax-free.
The Ruling highlights the narrow circumstances in which a beneficiary can roll-over a benefit arising from the commutation of a pension without the roll-over affecting the beneficiary's contributions cap. For example, where the lump sum is paid before the end of the 6/3 month period described above, the payment would still be deemed to be a 'superannuation death benefit' and thus would not qualify as a 'roll-over superannuation benefit'.
Self Managed Superannuation Funds Determination SMSFD 2013/1 - deceased member's benefits being cashed to that member's child
In SMSFD 2013/1, the ATO confirms that where a deceased member's benefits are cashed in the form of a pension or an annuity to a child of the deceased, the Regulations require the trustee to determine whether the child has a prescribed disability on the date the child turns 25 (or an earlier date if applicable under the Regulations) in order to determine whether or not the pension or annuity must be commuted and cashed.
Generally, under superannuation law trustees may only pay death benefits in the form of a pension or annuity to a pension dependant. In the case of a deceased member's child, that child must be:
- less than 18; or
- over 18 but less than 25 and financially dependent on the deceased; or
- at least 18 and have a defined disability.
SMSF trustees are further required to cash the death benefits as a lump sum on the earliest of:
- the day on which the pension is commuted (unless it is rolled-over to commence a new pension); or
- the day on which the child turns 25, unless the child has a defined disability.
SMSFD 2013/13 confirms that where a trustee determines that the child beneficiary has a defined disability, and wants to continue paying the child a pension after that child turns 25, the trustee must again make that same determination at the time the child turns 25 (or earlier if the pension is commuted).
Are the Rulings binding?
The first 4 of the Rulings described above are binding taxation determinations, which will protect taxpayers in the event the ATO later applies the law in a less advantageous way.
The last mentioned Ruling is a Self Managed Superannuation Funds Determination and consequently is not binding on the ATO. However, the ATO will take this Ruling into account in determining any penalties if a taxpayer relies on the ruling and is later found to be in breach of the law because of that reliance.
Where can I read the full Rulings
You can access each of the Rulings at:
- Taxation Determination TD 2013/10;
- Taxation Determination TD 2013/11 ;
- Taxation Determination TD 2013/12;
- Taxation Determination TD 2013/13; and
- Self Managed Superannuation Funds Determination SMSFD 2013/1 .
More information from Maddocks
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Superannuation team.
More Cleardocs information on related topics
You can read articles on a wide range of SMSF topics, here.
Order SMSF related document packages
- Set up an SMSF
- Update an SMSF deed
- Set up an SMSF pension
- Arrange SMSF borrowing documents:
- Set up an SMSF corporate trustee
- SMSF Death Benefit Nomination - binding or non binding
- SMSF Death Benefit Agreement - binding and permanent
- SMSF Minutes & Resolutions Package