Child Pensions - Taxation of the Commutation Payment at Age 25

On the death of a super fund member, the SIS Regulations require the death benefit to be “cashed out” as soon as practicable after the death of the deceased member.  Additionally, the SIS Regulations require (subject to one exception) the death benefit to be paid to or amongst the eligible beneficiaries of the deceased member.  The eligible beneficiaries include the legal personal representative, spouse and children of the deceased member.

The death benefit of a member is cashed out when it is paid as a lump sum to an eligible beneficiary or used to commence a pension from the fund for an eligible beneficiary.

However, if the eligible beneficiary is a child of the deceased member, cashing out by way of a pension from the fund is only permitted if:

•    the child is under 18 years of age; or

•    the child is aged 18 or more and less than 25 and was financially dependent on the deceased; or

•    the child is aged 18 or more and the child has a specified disability (defined by reference to the Disability Services Act 1986).

The SIS Regulations clearly state that the date of death of the deceased member is the date at which the age of the child is to be determined.  If the child is aged less than 18 at the date of death, then the benefit paid to the child can be paid as a pension.  It is irrelevant that the date on which the pension commences is after the child has attained age 18.  Similarly, if the child was financially dependent on the deceased at the date of death, it is irrelevant that the financial dependency has since ceased.  

Generally, a Child Pension must cease by the time the child is aged 25 and the pension account balance, if any is paid as a lump sum to the child.  The Child Pension could terminate before the child attains age 25 due to the pension account being exhausted or because the pension has been commuted before the child attains age 25.

If the pension is commuted (whether before or at age 25) the lump sum will be tax free (if the child was less than 18 years at the date of death of the member) and is taxable otherwise.  If the lump sum arising from the commutation is taxed the taxable component of the lump sum will be taxed at the marginal tax rate of the child (but capped at 20%) and the tax free portion will not be taxed.

The ATO has recently issued a Tax Determination which confirms that if the Child Pension is commuted (before or at age 25) the commutation lump sum will be tax free if the child was under age 18 at the date of death of the member.  Consequently, the view that the commutation lump sum was only tax free if commutation occurred on or before age 18 is not correct.  It should be noted that, if the child had attained age 18 at the date of death, the commutation lump sum would still be tax free if at the time of the commutation the child was permanently disabled.

Reference TD 2013/2