ATO ID 2014/2 and pensions to a deceased estate?

Some advisers may have previously recommended that there are opportunities to continue paying a pension following a member’s death to their deceased estate. However, ATO ID 2014/2 provides a real hurdle to this strategy!

(Note that this has been a somewhat busy time for the ATO and interpretative decisions regarding pensions. The ATO also recently released ATO ID 2014/5. ATO ID 2014/5 considers whether amounts paid by a superannuation fund to a fund member constitute a superannuation income stream benefit where trustee has agreed to protect part of the member’s account balance for an agreed period of time.)

Background to paying pensions to deceased estates

This strategy was particularly popular before the recent introduction of certain tax regulations that extend the pension exemption, where a member in receipt of a pension (that is not automatically reversionary) dies, to allow the exemption to continue for a limited time to allow the pension to continue or a lump sum to be paid.

Prior to the introduction of these tax regulations, the strategy of paying a pension to an estate was used to seek to extend the pension exemption.

(Note that DBA Lawyers has never been fond of this strategy as we believe that a pension can not be paid to a deceased estate pursuant to reg 6.21(2A) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’).)

However, along came ATO ID 2014/2, which examines whether a pension paid by an exempt public sector superannuation scheme (‘Scheme’) to a deceased estate should be treated as a superannuation lump sum death benefit. The facts of this interpretative decision can be summarised as follows:

• The deceased (‘Deceased Spouse’) was previously awarded part of her ex-husband’s fortnightly pension as a result of an order of the Family Court. She was receiving this pension at the date of her death.
• After her death, the Deceased Spouse remained a member under the Scheme rules and the Scheme was obliged to pay the pension to the executors of her estate until her former husband’s death. The Scheme rules only allowed the payment of pensions and did not allow lump sum benefits.
• The beneficiaries of the Deceased Spouse’s estate were her adult children who were not dependants of her ex-husband. The estate had no assets and was maintained to facilitate the ongoing payment of the pension to the Deceased Spouse’s adult children.

Note that different legislative provisions applied prior to the mid-2007 superannuation reforms and thus the outcome explained herein may have differed under the prior legislation.

(I refer to the term ‘pension’ above rather than the term ‘superannuation income stream’. The term pension is used in the context of the SISR and the term superannuation income stream is used in the context of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’). However, I will refer to the term superannuation income stream where this is technically apt below.)

ATO analysis

The ATO confirmed that the regular fortnightly payments to the estate were lump sums.

The payments are treated as lump sum superannuation benefits and since the Deceased Spouse was dead, they were therefore superannuation death benefits under div 307 of the ITAA 1997. This is interesting in view of the Scheme rules prohibiting lump sum payments. So how did the ATO reach this decision you may ask?

Firstly, the SISR prevents the payment of a pension to a non-dependant under regs 6.21(2A) and (2B) (as already alluded to above).

However, the Scheme was not regulated by the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) and the SISR as it was an exempt public sector superannuation scheme and not a regulated superannuation fund under SISA.

Nevertheless, the Scheme was governed by the ITAA 1997 to qualify as a complying superannuation fund. Thus the Scheme payments were subject to the definition of ‘superannuation income stream’ in the ITAA 1997. This definition requires that the payments must be made in accordance with the SISA and SISR.

The payments were not complying with the SISA and SISR as the payments were to the estate. Thus, the fortnightly payments did not qualify as a SIS and were therefore a lump sum. The payments were therefore assessed in the hands of the trustee of the estate on the basis that the beneficiaries are non-dependants.

Lessons learnt from ATO ID 2014/2

Advisers need to ensure they are aware that a pension (or more technically a superannuation income stream under the ITAA 1997) can no longer be paid to a deceased estate according to the ATO. Thus, if you wish to extend the pension exemption, you will need to ensure:

• The reversionary beneficiary is an eligible beneficiary (eg, a spouse and not an adult child who is not disabled) who is the recipient of an automatically reversionary pension (‘ARP’). However, unless you have a special SMSF deed and pension documents or an appropriately worded binding death benefit nomination with an appropriate deed, the pension is unlikely to qualify as an ARP. Most people however believe that a mere reversionary nomination is sufficient for this purpose. I recommend a close inspection of TR 2013/5 particularly paragraph 126.
• If the member dies without an ARP, the pension exemption will apply under the tax regulations discussed above from the time of the pensioner’s death until it is practicable to pay a pension or lump sum.

It is also interesting to note that the deed cannot overrule the law as it applies. In this case, the ITAA 1997 definition of superannuation income stream applied despite the provisions of the Scheme’s rules.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.