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Why 99% of super Testamentary Trusts are highly taxed and why there is a better way!

It is a lawyer's "go to" advice to establish a testamentary trust("TT") on death of a member of a superannuation fund to hold their death benefits. This is known as a superannuation proceeds trust an as we will see below the ATO has ruled that many TT's established through a Will have too borad a class of beneficiaries rather than a targeted "tax dependant" class.


At Abbott & Mourly Lawyers our preference for superannuation death benefits to children, spouses or financial dependants is to pay them to a death benefits Testamentary Trust established by the Trustee of the superannuation fund. The main advantages are that it sits outside of any family provisions claim (barring NSW - see our notional estate blog on this issue). Secondly it does not need to wait for probate and family provisions claim delays - it can be established within days. Finally, if goes to the spouse (and always establish a TT for a spouse to protect against future relationships), a child under 18 or 25 if financially dependant, a disabled child or a financial dependant adult child then it is tax free. If it goes to an adult child who is not a financial dependant, then the taxable component is taxed at 17%. The strategic advantage is that on death, subject to any SMSF Will or BDBN we know exactly what is going to happen - unlike many TTs established for a spouse and their family of non-dependants which are automatically taxed at 17% - even if the spouse is a beneficiary.


Why is that?


Private advice from the Australian Taxation Office (ATO) regarding superannuation death benefits paid to the trustee of a deceased estate reviewed this issue. The advice was issued on 23 November 2021 and has an Authorisation Number of 1051920326857. The ruling addresses two questions: whether subsection 302-10(3) of the Income Tax Assessment Act 1997 applies to superannuation death benefits paid to the estate of the deceased, and whether superannuation death benefits paid from the estate to a testamentary discretionary trust will be treated as if they had been paid to death benefits dependants. The answers to these questions are “Yes” and “No,” respectively.


In their analysis the ATO looked at several legislative provisions, including sections 302-10, 302-195, 307-5, 307-65, and 307-70 of the Income Tax Assessment Act 1997.


According to the ruling, superannuation death benefits paid to a trustee of a deceased estate are subject to tax in accordance with the taxation arrangements that would apply to the person or persons intended to benefit from the estate. This means that if a dependant of the deceased is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a dependant of the deceased. On the other hand, if a person that is not a dependant is expected to receive part or all of a superannuation death benefit, it will be subject to tax as if it were paid to a non-dependant of the deceased.


In this particular case, the ruling states that subsection 302-10(3) of the Income Tax Assessment Act 1997 applies and that the superannuation death benefits paid to the estate of the deceased are subject to tax as if they were paid to a non-dependant of the deceased due to the drafting of the testamentary trust deed. This is because there is no certainty that death benefits dependants will benefit from the superannuation death benefits in their entirety as the primary and secondary beneficiaries run to non-dependants.


Be safe and where possible use a SMSF Will that sets up a Death Benefits TT which can be done through Abbott & Mourly Lawyers.



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