Delayed payment of a death benefit to the spouse - payment taxable

In a recent Private Binding Ruling the ATO was asked to consider the tax treatment of the death benefit where the death benefit was paid after the surviving spouse had passed.

Edward (a fictional name) was receiving a pension from a superannuation fund (the type of fund was not specified in the ruling).  The pension was reversionary to his spouse, Anne (another fictional name).  Edward died in September 2019.  As the pension was reversionary, the pension should have automatically transferred to Anne.  For reasons not explained in the Ruling, the trustee did not take any action to effect the transfer of the pension to Anne and Anne apparently took no steps to claim the pension.

Edward’s Last and Will and Testament provided that all his property was to pass to Anne if she survived him for 30 days, which she did.  In fact Anne only died in May 2022.

At the time of Anne’s death (some 30 months after Edward’s death) the reversionary pension still had not transferred to Anne.

The super fund subsequently paid the balance of Edward’s pension account to the Administrator of Anne’s estate.  No tax was deducted by the super fund.  Presumably, the super fund realised that as the pension was reversionary to Anne, the pension account balance could only be paid to her Estate.

As the only beneficiaries of Anne’s estate were the two adult children of Anne and Edward, the question arose as to whether tax should be deducted by the Administrator when paying the benefit to the two children.

One the one hand, Anne was clearly a death benefit dependant of Edward and his pension account balance should have been paid to Anne during her lifetime.  On the other hand, when the pension account balance was paid, it was paid not to Anne but to her Estate.

The ATO had to apply the relevant taxation provisions to the circumstances which have occurred and not the circumstances which would have occurred if the pension had reverted.  In this case Edward’s pension account balance was paid after Anne’s death to her Estate.  The relevant taxation provisions provide that when a super fund pays a death benefit to an Estate, no tax is deducted by the super fund.  Whether tax is deducted from the death benefit is determined by the Estate depending on whether the death benefit will be received by a death benefit dependant once the Estate has been administered. 

To the extent that a death benefit dependant may have benefited or may be expected to benefit from the death benefit payable from the Estate, the death benefit will be tax free.  Unfortunately, while Anne was clearly a death benefit dependant she has not benefited and cannot now benefit from the death benefit.  As the only individuals who can benefit are not death benefit dependants of Edward, tax must be deducted by the Estate.

If the pension had reverted to Anne, then Anne may have commuted the pension just before her death with the result that the then pension account balance would have been paid to her Estate as a superannuation member benefit and not as a superannuation death benefit.

Would the situation have been different if Anne had remarried and been survived by James (fictional name for her fictional second husband) and left a Last Will and Testament naming James as being a 1/3^rd beneficiary of her estate along with her children with Edward?  Well…….

While the pension should have reverted to Anne, nothing occurred during her lifetime.  After her death the pension could not revert to her and a pension could not be paid to the Executor of her Estate.  The pension account balance could be paid as a lump sum to Anne’s Estate as it was an amount payable to her. 

For the payment from Anne’s Estate to James to be tax free James must be a death benefit dependant.  But a death benefit dependant of whom?  Is the relevant connection that James must be a death benefit dependant of Edward or of Anne?  While James is a death benefit dependant of Anne, he is not a death benefit dependant of Edward (even though they were best mates!). 

As the payment from the Super Fund to Anne’s Estate can only be justified if it is a payment of a debt due to Anne from the Super Fund which was a debt which arose during her lifetime – then the payment to James will mostly be tax free as James is a death benefit dependant of Anne. 

The payment from the Super Fund to Anne’s Estate must be a payment of a debt due to Anne (being a debt which arose during her lifetime) otherwise it is difficult to see how the payment could be made at all.

Possibly the whole matter turns upon the precise nature of a reversionary pension.  If the pension automatically transfers on death to the nominated reversionary beneficiary, then enforceable legal rights have been created – which rights are not destroyed merely because the beneficiary of those rights (in this case Anne) has not enforced her rights and those rights survive Anne’s death and can therefore be enforced by the Executor of Anne’s Estate.  If so James’ share of the payment can be tax free in his hands. 

NOTE:  This article is based on PBR 1052122053885 released on the ATO’s website on 21 August 2023.  As Rulings are anonymised before release, fictional names have been inserted for ease of reference.