Tax Tip 162: Taxation of Superannuation Proceeds Trusts

Taxation of Superannuation Proceeds Trusts

When drawing up a will it can be a good idea to incorporation a Superannuation Proceeds Trust (SPT) to segregate any superannuation death benefits so that they are paid into the estate and then out to tax dependants instead of going into the pool of assets of the deceased and then out to the beneficiaries named under the will.
See my legal tip:
Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?
Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?

Superannuation death benefits can be taxed when received by non-tax dependants or tax free when received by tax dependants.

A tax dependant is defined under s302-195 ITAA97 and basically is limited to a spouse/former spouse or children under 18. See my post about this here:
Tax Tip 144: Taxation of Super on death Tax Tip 144: Taxation of Super on death

The taxation of super paid to the estate happens on a look ‘through basis’ where the legal personal representative is taxed on the proceeds on the basis where they could end up. So if the will is structured so that they proceeds could go to a non-dependant the estate will be taxed as a non-tax dependant. S302-10 ITAA97.
INCOME TAX ASSESSMENT ACT 1997 - SECT 302.10 Superannuation death benefits paid to trustee of deceased estate

This could mean tax of 15% or 30% on the taxed element of superannuation.

Therefore where you have minor children or a spouse or may possibly have one or more of either at death then consider incorporating a Superannuation Proceeds Trust in your Will.

See also
3 Strategies to Save Tax on Super at Death 3 Strategies to Save Tax on Super at Death

 

pThe tax treatment remains the same whether super flows through a specific trust or direct to estate beneficiaries in any event. The look through approach is so often misunderstood and then ignored.

The taxation of some elements of super is commonly missed by many lawyers when they do a deceased estate. They fail to advise beneficiaries who arent a death benefit dependent (ie adult children) that they have a proportionate entitlement to an untaxed element of death benefits they must declare and pay tax on.

eg Dad passes away two years after MUm and has $500K of cash and super accounts with a $400K value. (Lets assume he doesnt own a house). Two beneficiaries exist - One is his 21 year old son attending uni who lived with Dad. The other is his elder daughter (age 30) married and living interstate. Each inherit 50%.
The estate value is say $900K. Son inherits $450K and so does Daughter. However Daughter would be taxed at 15% (30% if the fund was a untaxed fund eg state govt, commonwealth) on $200K of her inheritance. She is not a dependant and is aged over 18 in any event. The son is financially dependant on Dad and so no tax consequence arises.

Terry's SPT would allow all the $400K to be streamed to the son and remain untaxed and if the will provided, the Daughter would still receive the same inheritance - But its 100% tax free. Saving $34000 tax (Medicare levy of 2%!!)

Paying superannuation death benefits

The definition of a dependant is slightly different for:

A who you can pay a death benefit to (superannuation law)
B how the death benefit will be taxed (taxation law).

Under superannuation law, a death benefit dependant includes:

• the deceased's spouse or de facto spouse
• a child of the deceased (any age)
• a person in an interdependency relationship with the deceased
  • this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

Under taxation law, a death benefit dependant includes:

• the deceased's spouse or de facto spouse
• the deceased's former spouse or de facto spouse
• a child of the deceased under 18 years old
• a person financially dependent on the deceased
• a person in an interdependency relationship with the deceased.

There is an exception...., a person is included in the definition of a death benefit dependant if they receive a super lump sum because the deceased died in the line of duty. This will be as a member of the defence force, the Australian Federal Police or the police force of a state or territory, or as a protective service officer.

The other matters solicitors can routinely gloss over include:
- Ignoring CGT costbase advice / guidance and information to beneficiaries
- Ignoring contingent "date of death" CGT liabilities when calculating assets / estate splits...In cases when one beneficiary takes "property" and another takes cash this can be problematic.

While many lawyers are strong in terms of tax laws they may lack the practice experience. For this reason a large number of solicitors engage a tax adviser. Those that dont may leave a tax legacy with the beneficiary and remain exposed to a PI claim. We have recently assisted two taxpayers with such claims.

 

Oh and non-residents who inherit AU death benefits this issue can be worse. Tax law defines the source income of a taxable death benefit amount arising from super as Australian income and an Australian tax return is required.

 

There would be a difference in tax out comes between situations such as this

a) superannuation death proceeds paid into the estate with spouse and adult children being entitled to the estate in equal shares.

In this case the adult children are no tax dependants so there will be higher tax payable.

Compared to
b) superannuation death proceeds are paid to the estate and segregated into a SDT of which only tax dependants are beneficiaries - if a spouse and adult children are left behind only the spouse would be a beneficiary and no tax would be taxable.

An equilisation clause could then be used to adjust the rest of the estate so the spouse's share is reduced and the adult children's share is increased.

Net result is more benefits for the family individually and as a whole.