WHAT IS SUPERANNUATION PROCEEDS TRUST (SPT)
Superannuation proceeds trust (SPT) – is a trust that is 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. The Income Tax Assessment Act 1997 (Cth) (ITAA 1997) provides that a superannuation death benefit, paid to a death benefit dependant as a lump sum, is not assessable income.
DEATH BENEFIT DEPENDANT
A death benefit dependant (defined under section 302-195 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 section 302-200 ITAA 1997; and
• person financially dependent on the deceased just before they died.
Where there are death benefit dependants, under a deceased estate, who are potential recipients of superannuation benefits, it is often appropriate to allow for a separate SPT under the will in addition to any testamentary trust, 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 testamentary trust that has beneficiaries who are not ‘death benefit dependants’. A death benefit received by a legal personal representative (LPR) is treated as income to which no beneficiary is presently entitled. The LPR is, therefore, liable for any tax liabilities under section 99 ITAA 1936.
HOW DOES IT WORK
In practical terms, when 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In particular, ATO Interpretative Decision (ID) 2001/751 (which has since been withdrawn on the basis that its view has been subsumed into section 302-10 ITAA 1997) confirms that it appears to be the clear intention of the legislation that the fact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.
SPT AND INCOME BENEFICIARIES
The guidance available in relation to whether tax will be payable on receipt of the superannuation proceeds under section 302-10 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 98/4, that a SPT can include a broad range of discretionary income beneficiaries. While Taxation Ruling 98/4 sets out the ATO’s view in relation to child maintenance trusts, established to access the concessional taxation rates for minors under section 102AG ITAA 1936, it can be argued that the comments apply to all such trusts (including SPTs).
Taxation Ruling 98/4 also confirms that the trust deed (or will) may contain mechanisms to prevent the rule that the beneficiaries can agree to wind up and distribute the assets of a trust among themselves where they are absolutely entitled to the trust property.
ESTABLISHING SPT AFTER DEATH
A form of SPT can also be established after the death of the member, and can be useful where there are substantial superannuation assets within a deceased estate and where there is a death benefit dependant, but where the will maker had not incorporated testamentary trusts into the will.
When relying on this approach, difficulties can arise as, in many cases, superannuation fund trustees might not have discretion to pay proceeds to a SPT under their trust deed. Furthermore, many trustees appear to adopt an interpretation of the superannuation laws that prohibits any such payment. Often there is no clear pathway to allow the trustee of a superannuation fund to distribute to a SPT unless the SPT has been established under the deceased’s will.
SPT is solely for superannuation proceeds from estate of deceased to its death benefit dependant. 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.
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