For those that do not otherwise have access
to the Weekly Tax Bulletin, the further article from earlier this month
by fellow View Legal Director Patrick Ellwood and me is extracted
below. It provides a more technical
analysis of the various issues surrounding superannuation proceeds trusts,
building on the discussion in recent posts.
A
superannuation proceeds trust (SPT)
is a trust established solely to receive superannuation proceeds on the death
of a fund member. A SPT can be
established by a will or by deed after the death of an individual, although
establishing the structure post death can be problematic and is outside the
scope of this article.
The ITAA
1997 provides that a superannuation death benefit, paid to a death benefit
dependant as a lump sum, is not assessable income. A death benefit dependant (defined under s
302-195 of the ITAA 1997) is a:
- spouse or former spouse of the deceased;
- child, aged below 18, of the deceased;
- person with whom the deceased had an
"interdependency relationship", as defined by s 302-200 of the ITAA
1997; or
- person financially dependent on the deceased
just before they died.
Payments to the estate
Where there
are death benefit dependants under a deceased estate who are potential
recipients of superannuation benefits, it is often an appropriate estate
planning strategy to allow for a separate SPT under the will in addition to any
testamentary trust (TT), so that a
tax-free distribution of the superannuation proceeds can be achieved via a
protected structure. Other estate assets
can be distributed to a TT that has beneficiaries who are not death benefit
dependants.
When the superannuation
proceeds are paid to a SPT, the legal personal representative (LPR) is taxed in accordance with how
the person or persons intended to benefit from the estate would be taxed were
they to have received the payments directly.
That is, ATO will generally adopt a "look through" approach as
if the death benefit had been paid directly to the recipient.
To ensure
that any receipt of superannuation proceeds is tax-free, the LPR should ensure
that, at least at the time of receipt of the superannuation proceeds by the
SPT, the only capital beneficiaries of the SPT are those who meet the
definition of "death benefit dependant" under s 302-195 of the ITAA
1997.
In practical
terms, this means that where there is more than one death benefit dependant,
the terms of the SPT should provide that they receive the trust capital in
specified shares on vesting.
In
particular, ATO Interpretative Decision 2001/751 (which has since been
withdrawn on the basis that its view has been subsumed into s 302-10 of the
ITAA 1997) confirms that it appears to be the clear intention of the
legislation that the fact that a payment is made to a trustee, rather than
directly to the dependant, should not obscure the fact that the payment is
ultimately for the benefit of the dependant.
In the facts considered in ATO ID 2001/751, the
death benefit dependant was the sole beneficiary of the trust and, therefore,
absolutely entitled to the income and capital of the trust.
Income beneficiaries of a SPT
The
requirement that death benefit dependants receive the capital on the ending of
the trust is also driven by the requirements of s 102AG(2) of the ITAA 1936,
which sets out the basis on which trust property must be regulated when the
trust ends, in order to access the excepted trust income provisions. The excepted trust income provisions
effectively allow infant beneficiaries of income distributions to be taxed as
adults.
There is
limited guidance about whether the ATO will require all the income
beneficiaries of a SPT to be death benefit dependants.
The
conservative position would be to limit the income beneficiaries of the SPT to
death benefit dependants only. In
particular, the guidance available in relation to whether tax will be payable
on receipt of the superannuation proceeds under s 302-10 of the ITAA 1997
indicates that the income and capital beneficiaries should be limited to death
benefit dependants.
It is
arguable however, based on the ATO's comments in Taxation Ruling TR 98/4, that
a SPT can include a broad range of discretionary income beneficiaries. While TR 98/4 sets out the ATO's view in
relation to child maintenance trusts (see 2015 WTB 11 [287]), it can by analogy
be argued that the comments apply to other similar types of trusts (including
SPTs).
Furthermore,
in practical terms, it appears that the ATO only tests the range of potential
beneficiaries of the SPT at the date at which the superannuation proceeds are
received by the SPT (for example, see private ruling authorisation number
1011741138466).
Therefore,
even if a trustee takes the conservative approach, that is, to limit the range
of potential income beneficiaries to death benefit dependants, following
receipt of the proceeds, it may be possible for the range of beneficiaries to
be expanded to include non-death benefit dependants.
Below is a diagram giving an example of making
distributions under a will to a TT and a SPT.
Provisions of a will
For
completeness, as superannuation proceeds do not automatically form part of the
estate of the deceased member, it may be necessary to ensure that appropriate
nominations are made by the member to direct that the superannuation death
benefits are paid to the LPR for distribution under the will, and if
appropriate, to any SPT established.
Assuming
proceeds are paid under a will, the LPR should have the power to ensure that
the range of potential beneficiaries can be limited to persons:
- within the provisions of s 295-485(1)(a) of
the ITAA 1997; and
- who satisfy the definition of "death
benefits dependant" under s 302-195 of the ITAA 1997.
The main
reason both these provisions should be mentioned is due to the requirement
under s 295-485(4) that regard needs to be had to the extent to which a death
benefit dependant can reasonably be expected to benefit from the estate.
In
particular, s 295-485 of the ITAA 1997 gives superannuation funds the ability
to claim a tax deduction based on an increased amount of superannuation lump
sum death benefit paid under the "anti-detriment" rules, with
reference to the tax paid on contributions.
Conclusion
In many
respects, the ability to utilise a SPT under a will incorporating a TT is a
simple, yet powerful, strategy that practically is useful in a large range of
circumstances.
There are
however some fundamental threshold issues that need to be addressed to ensure
the expected income tax concessions can be validly accessed. Furthermore, given the significant number of
estate planning related issues aside from tax that are potentially relevant, it
is critical that a methodical approach is adopted.
