ATO declares payment of a death benefit to a spouse’s estate not to be tax-free

The tax treatment of superannuation death benefits is determined by the recipient and whether they qualify as a death benefit dependant under the Income Tax Assessment Act 1997 (ITAA 97). While a spouse is a death benefit dependant, the question arises: does a spouse’s estate also qualify as a death benefit dependant?  

In Private Binding Ruling 1052273158502 (PBR), the ATO addressed this issue and concluded a spouse’s estate is not considered a death benefit dependant, and therefore payment is not tax-free, where the beneficiaries of the spouse’s estate are not death benefit dependants of the deceased.

Who is a death benefit dependant?

The ITAA 97 defines death benefit dependants as:

• The deceased’s spouse or former spouse

• A child of the deceased under 18 years of age

• Any person with whom the deceased had an interdependency relationship

• Any person financially dependent on the deceased

If the trustee of a superannuation fund pays a death benefit directly to a death benefit dependant, the benefit is tax-free. However, it is not so clear cut if the trustee of the superannuation fund instead makes payment to a legal personal representative (i.e. the executor of an estate).

Background

The facts of the PBR were as follows: when the deceased died, the spouse was the sole beneficiary of his superannuation death benefits. However, before the superannuation fund trustee could make payment to the spouse, the spouse also died. As a result, the trustee of the superannuation fund determined to direct the payment of the superannuation death benefits to the spouse’s estate.

Ruling

Had the death benefit been paid directly to the spouse while she was alive, then such payment would have been tax-free, as the spouse would have qualified as a death benefit dependant. However, as the spouse died prior to payment being made, the spouse could not be said to benefit from the deceased’s superannuation death benefits. The key issue of the PBR was then determining who, under section 302-10(2) of the ITAA 97, would benefit, or could be expected to benefit from the superannuation death benefits.

In its decision, the ATO applied the ‘look through’ approach and concluded that the beneficiaries of the spouse’s estate, who would benefit from the superannuation death benefits, were not death benefit dependants of the deceased. As a result, section 302-10(1) of the ITAA 97 did not apply and payment to the spouse’s estate was not tax-free.

Key Take-Aways

It is important to note that a spouse’s estate cannot be a direct beneficiary of a deceased’s superannuation death benefit. In this case, payment to the spouse’s estate was only possible because the benefits were paid to the spouse’s representative. However, it was the application of section 302-10 of the ITAA 97 that was critical in the PBR.

Section 302-10 of the ITAA 97 broadly applies to payments made to any estate, not just the deceased’s estate. As a result, the ‘look through’ approach was applied to the spouse’s estate, meaning that the ultimate beneficiaries of the spouse’s estate were fundamental in determining the tax treatment of the superannuation death benefits.

This PBR highlights the importance of considering the ultimate beneficiaries of superannuation death benefits if paid to a legal personal representative of any estate.  

Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal

Tayla Berger
Senior Associate
T 03 5226 8559 | M 0407 825 365
E tberger@ha.legal

Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M 0491 307 550
E: jflanagan@ha.legal