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(June-2002) Trustee update
In a recent decision of the Supreme Court of Victoria (Fyffe & Anor v Fyffe [2002] VSC 120), the court held that a trustee of a deceased estate was obliged to withhold the tax payable on a death benefit eligible termination payment (ETP) due to the adult children of the deceased following their testator family maintenance claim.
Background
The executive of the deceased estate (the trustee) had entered into a settlement with the adult children of the deceased (the plaintiffs) in relation to a testator family maintenance application. The only asset of the deceased at the date of his death was a $750,000 interest in a superannuation fund.
Pursuant to the terms of the settlement, the trustee agreed to pay to the plaintiffs $147,500 in full and final settlement of their claim. However, in making the payment to the plaintiffs, the trustee withheld $31,713 and paid it to the ATO, in fulfilment of the trustee’s obligations under s27AAA of the Income Tax Assessment Act (ITAA) 1936, which generally provides that death benefits payable to non-dependant beneficiaries of a deceased estate are taxable. The plaintiffs sought court orders directing the trustee to pay them the $31,713 tax withheld in accordance with the full settlement amount. The plaintiffs argued that the trustee was required to pay the full amount to the plaintiffs under the terms of the settlement.
Decision
The court dismissed the plaintiffs’ application finding that the trustee was liable to pay tax on the portion of the deceased’s superannuation to be paid to the plaintiffs. As the plaintiffs were not dependants of the deceased at the time of his death, the lump sum death benefit ETP was taxable under s27AAA. Therefore, the court held that the trustee was justified in making the payment to the ATO, noting that if she had not done so, ultimately, the plaintiffs would have been required to make the tax payment.
How are death benefitETPs taxed?
A death benefit ETP is an amount that would otherwise be an ETP that is paid after the death of a person, either directly to a dependant (as defined) or to the estate of the person. Where payment is to the trustee of the estate, whether a person is a dependant or not will depend upon the extent to which that person may reasonably be expected to benefit from the estate.
Section 27AAA of the ITAA identifies death benefit ETPs by reference to the paragraph of the definition of an ETP into which they fall and provides for concessional tax treatment by reducing the taxable amount of the ETP by its entire amount or a portion of the amount depending upon its quantity and the extent to which dependants will benefit from the payment.
Broadly, death benefit ETPs within the pension reasonable benefit limit ($1,058,742 for 2001/02 or a higher transitional RBL) of the deceased are taxed as follows:
benefits paid to dependants are exempt from tax;
benefits paid to non-dependants are taxed as ordinary ETPs.
However, the post-June 1983 component of such ETPs is taxed at a maximum rate of 15 per cent (plus Medicare levy) if paid from a taxed source and 30 per cent (plus Medicare levy) if paid from an untaxed source.
Benefits paid in excess of the deceased’s pension RBL entitlement are taxed as an excessive component of an ETP (47 per cent), regardless of whether they are paid to a dependant or non-dependant.
Dependants
In addition to its ordinary meaning of a person who depends on another for support, the term dependant is defined in s27A to include a spouse (or former spouse) of a person and any child of the person under 18 years of age. The term spouse includes a bona fide de facto spouse. In addition to the s27A definition, the ordinary meaning of the term dependant includes a person who is financially dependent on the person.
In Administrative Appeals Tribunal (AAT) Case [2000] AATA 8 (2000) 43 ATR 1273, the tribunal held that dependant in this context referred to financial dependence. As a result, the tribunal found that the parents of a deceased son were not his dependants, as they were not financially dependent upon him. Also, in AAT Case 12,501 (1997) 37 ATR 1233, a taxpayer failed to satisfy the tribunal that she was a dependant of the deceased as the parties did not live together in any sense of that phrase, there was no financial interdependency and there was no joint ownership of property.
— Stuart Jones is a tax and superannuation writer at Australian Tax Practice.
Email: [email protected]
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