Clarify tax law on death benefits in trusts

Government plans to exempt testamentary trusts and deceased estates from the minimum tax on capital gains need further refinement to ensure superannuation death benefits are viewed as assets of those structures and not income, according to the SMSF Association.

In its submission to Treasury regarding tranche 2 of legislation that would enact changes to capital gains tax and negative gearing announced in this year’s budget, the professional body highlighted an interaction between provisions in the Income Tax Assessment Act (ITAA) 1936 and proposed changes to ITAA 1997 would tax death benefits as a capital gain.

The association noted ITAA 1936 confines a current tax concession in a testamentary trust to income derived from property transferred to the trust from the deceased estate, and any accumulations of income or capital from that property, to prevent assets unrelated to an estate being added to the trust.

These provisions would be expanded in ITAA 1997 with proposed changes that would exempt a trust where a capital gain related to the property income arose.

However, the submission noted the interaction of these provisions with a superannuation death benefit paid to a deceased person’s legal personal representative (LPR) needed clarification, given the role testamentary trusts had in estate and succession planning.

“A superannuation death benefit is not ordinarily an asset legally owned by the deceased immediately before death,” the association stated.

“Nevertheless, it has an obvious and substantive connection with the deceased. It arises from the deceased member’s superannuation interest and becomes payable as a consequence of the member’s death.

“Where the death benefit is paid to the LPR, forms part of the deceased estate and is subsequently transferred to a testamentary trust in accordance with the deceased’s will, the arrangement is materially different from the injection of unrelated property into a testamentary trust.”

The submission pointed out the policy behind the relevant section in ITAA 1936 and the explanatory material for the change to ITAA 1997 also recognised death benefits differed from efforts to inject other assets into an estate or testamentary trust and should be recognised as such.

“Neither the proposed legislation nor the explanatory material expressly confirms the treatment of a superannuation death benefit paid to an LPR after death,” it added.

“Given the frequency with which superannuation death benefits are directed to an estate as part of conventional estate planning, taxpayers should not be required to obtain private rulings or rely upon broader statements of legislative purpose to establish the tax treatment of such an ordinary arrangement.

“The association therefore recommends that the legislation expressly confirm that … property transferred to a testamentary trust from a deceased estate can include a superannuation death benefit received by the LPR as a consequence of the deceased member’s death.”