This is always an interesting issue, The ATO issued an ID 2004/688 which is detailed below.
The basic analysis the ATO has given is that at the time the member dies, the member ceases to be a pensioner and reverts to a member receiving a death benefit, hence their benefits are no longer entitled to a tax free status.
This would be inrespective of the fund being segregated or apportioned, or having other members, as this is a member related issue.
Exempt income - segregated current pension assets
FOI status: may be released
Status of this decision: Decision Current
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This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Does the exemption provided by section 282B of the Income Tax Assessment Act 1936 (ITAA 1936) for exempt pension income continue to apply after the death of a sole member of a superannuation fund who was in receipt of a pension prior to his death?
No, the exemption provided by section 282B of the ITAA 1936 for exempt pension income does not continue to apply after the death of the sole pension recipient of a superannuation fund.
The fund is a complying superannuation fund.
The fund has a single member.
The fund was paying a pension to the member.
The member of the fund died.
The trust deed of the fund does not provide for reversionary pensions or annuities to be paid. On the death of the member, any remaining monies are payable as a lump sum to the member's 'Nominated Dependant.'
Reasons for Decision
Section 282B of the ITAA 1936 allows an exemption from tax for the amount of normal assessable income of a complying superannuation fund that is derived from segregated current pension assets.
Section 273A of the ITAA 1936 provides that assets are 'segregated current pension assets' if:
- the assets are invested, held in reserve or otherwise being dealt with at that time by the fund for the sole purpose of enabling the fund to discharge the whole or part of its current pension liabilities as they become due; and
- the trustee of the fund obtains an actuary's certificate before the certificate date to the effect that the amount of the assets, if accumulated after the particular time at the rate the actuary expects will be the rate of the fund's earnings on those assets, would provide the amount required to discharge in full the whole or the part, as the case may be, of the current pension liabilities as they fall due.
This means that assets are current segregated pension assets only when they are held or invested for the purpose of paying current pension liabilities. A 'current pension liability' is defined in subsection 267(1) of the ITAA 1936 as a liability, including a contingent liability, of the fund to make a payment in respect of a pension payable by the fund at the particular time. In other words, once a fund no longer has any current pensions in payment and there is no provision for a contingent pension to commence, the fund no longer requires current pension assets.
Where a fund ceases to have a current pension liability due to the death of a sole member with no contingent pension payable, the assets cease to be 'current pension assets' and the income is no longer exempt pension income. As a result the exemption provided for by section 282B of the ITAA 1936 ceases to apply.
Date of decision: 1 July 2004
Income Tax Assessment Act 1936