You may be aware that toward the end of 2021, in a private ruling, the ATO confirmed the tax payable in respect of a gift of superannuation to a member’s estate where that super is to be held in a testamentary discretionary trust.
With superannuation being the second main asset after the family home for many families, increasingly superannuation death benefits are being paid to a deceased estate. This means that the deceased person’s Will directs what will happen to the superannuation. But what if the Will includes Testamentary Discretionary Trusts (TDTs)?
1. Can Superannuation be paid into a Testamentary Discretionary Trust?
Yes, it can, if paid to the deceased person’s estate on their death. However, who the beneficiaries of the TDT are will determine whether or not any tax will be payable on the payment.
2. Will Tax be payable on the Superannuation Payment?
If all the beneficiaries of the TDT are restricted to “tax dependents” (most usually the surviving spouse and any children under 18 years old) and no other persons, then it will be received by the TDT free of tax. This type of TDT is often known as a Superannuation Proceeds Trust.
However, normal TDTs have a wide range of beneficiaries which may include non-tax dependents such as independent adult children, grandchildren, parents, etc. So, if a superannuation death benefit is paid into such a TDT, then as non-tax dependents may be able to benefit from the super payment, it will not be received tax free.
Instead, it may be taxed – at 15% on any taxed component, and up to 30% on any untaxed component.
3. Should my Will have a Superannuation Proceeds Trust?
While it may be tempting to think that having a Superannuation Proceeds Trust in your Will solves any tax issues, it should be understood that a Superannuation Proceeds Trust is not always appropriate, such as in the following circumstances:
• If the surviving spouse and/or dependent children receive all the super death benefit under a Binding Death Benefit Nomination (BDBN) – since no part of the death benefit will go into the estate;
• If there is no surviving spouse and no dependent children (e.g. all the children are over 18 years old and financially independent) – so if the super was paid into the estate, it cannot be paid to a Superannuation Proceeds Trust even if the Will includes it;
• If there are multiple children but only some are under 18 years old (this is often the case with “blended families”) – depending on the overall estate strategy, it may not be appropriate if only some of the children can receive the super tax free and the others cannot, without other measures in place to equalise their inheritances.
It’s important to remember a Will is not a static document and we recommend they be reviewed every two to three years or whenever there are major changes to succession or tax laws or a major life event such as marriage, divorce, property purchase/sale, birth, death or material inheritance.
The ruling is available at 1051920326857 | Legal database (ato.gov.au)
