Understanding Superannuation Death Benefits in Testamentary Trusts and Succession Planning

In a recent private binding ruling (PBR 1051920326857), an important scenario involving superannuation death benefits and testamentary trusts has come to light.

The ruling examined whether death benefits paid through an estate into a testamentary trust would be classified as tax-free or taxable.

In the ruling, the beneficiaries of the testamentary trust were defined as:

1. The deceased’s spouse and their direct descendants (the “primary beneficiaries”); and
2. The trustee of any trust where the primary beneficiaries are designated as beneficiaries; and
3. Any company where a primary beneficiary serves as a Director or holds shares.

The issue at hand is that for superannuation death benefits to remain tax-free, it must be assured that only death benefit dependents receive the superannuation proceeds.

In this ruling, the terms of the testamentary trust introduced potential beneficiaries that could complicate this certainty, namely:

1. The deceased’s spouse (a death benefit dependant);
2. Lineal descendants, which could include future generations who are not yet born and therefore cannot be considered death benefits dependents; and
3. Various entities, some of which may not even exist yet – which also do not qualify as death benefits dependents.

Tax Implication:

Due to the broad range of potential beneficiaries outlined in the testamentary trust, the ruling determined that the death benefits would be treated as taxable, akin to payments made to non-death benefit dependents. This tax liability could have been avoided if the testamentary trust had explicitly limited its beneficiaries to those classified as SIS (Superannuation Industry (Supervision) Act) death benefits dependents.

If you currently have a testamentary trust will that is intended to serve in this capacity, it is therefore crucial to review its terms.

We have seen too many other legal practitioner, who purchase testamentary trust templates and deliver them to their clients as part of succession planning (often charging $10,000+ for the benefit), making this simple mistake that likely won’t be realised until the testator passes away, but it actually causes a substantial tax consequence for the estate (anywhere from 15% to 30% tax payable on inherited superannuation).

If this sounds like something you need assistance with or you are simply interested in discussing your succession plan, feel free to reach out to the team at South Geldard Lawyers.