Superannuation death benefits paid directly to a member’s death benefit dependants and which bypass the deceased member’s estate are ordinarily received by those death benefits dependants free of tax. Whilst a highly favourable outcome from both the recipient and the fund trustee’s perspective, the receipt of benefits in a dependant’s personal name may leave the benefits exposed to creditors and Family Court claims.

Enter the Superannuation Proceeds Trust (SPT). 

An SPT is a trust in which the capital is sourced only from a deceased superannuation fund member’s death benefits.  SPTs can provide all of the taxation advantages associated with paying the benefits directly to a death benefits dependant, while at the same time, providing a level of protection from potential claims against the dependants.

This article considers some structuring considerations and the utility of an SPT created under the terms of a deceased member’s Will (and not by separate deed).

Taxation of SPTs

The starting point is considering those eligible to receive superannuation death benefits tax exempt, known as “death benefits dependants” under Division 302 of the Income Tax Assessment Act 1997 (Cth) (ITAA97).

A death benefits dependant includes:

• a member’s spouse; and
• a member’s children who are aged under 18.

 An adult child, or any other person, can be deemed to be a death benefits dependant if:

• such person was financially dependent on the deceased member, or
• such person had an ‘interdependency relationship’ with the deceased.

Division 302

A “look through” approach is applied in determining the taxation of superannuation death benefits paid to a trustee of a member’s estate. 

Where it is clear that only death benefits dependants have benefitted or are expected to benefit from a member’s death benefits paid into the deceased member’s estate, the law treats the benefits as if they were paid to the recipient dependant personally. If such benefits are to be held upon an SPT for the benefit of those death benefits dependants, the terms of the SPT should limit the beneficiaries to the member’s death benefit dependants.

Put simply, this means that the capital of the SPT must be held for the benefit of the named beneficiaries in the trust deed being the member’s death benefit dependants.   If the capital is held for a broad range of beneficiaries (as is the normal intention with a discretionary trust), the taxation advantages of Division 302, will not flow. 

In the authors’ view, a carefully drafted SPT deed (under a member’s Will) may be prepared in a manner which allocates the benefit of the trust capital and income to the member’s death benefits dependants in the first instance.  This would potentially allow for the executors of the deceased member’s estate to receive the death benefits tax-free and also, possibly provide concessional tax treatment for distributions of net trust income to minor beneficiaries under Division 6AA of the ITAA36 (refer below).

Even if the SPT was drafted limiting the income and capital beneficiaries to death benefits dependants, provided there is an appropriate power of amendment within the SPT deed, the trustee may in the future include further income only beneficiaries (not being death benefit dependants) to enable the future distribution of income of the SPT to a broader range of discretionary beneficiaries. 

One might question whether this affects the ability for the superannuation death benefits to be received by the “trustee of a deceased estate” tax free in the first instance under the ITAA97.  It should be noted that the taxing point of a superannuation death benefit is generally at the time of receipt of the death benefits by the “trustee of a deceased estate” and the provision could be argued not to apply on an ongoing basis. 

Where only specified beneficiaries, being the death benefit dependants of the relevant deceased member, are expected to benefit from the lump sum death benefits (being the settled sum and capital of the SPT) at the time of payment to the executors, the authors are of the view that the deceased member’s death benefit dependants can be argued to be the only beneficiaries of the estate expected to have benefited or expected to benefit from the superannuation death benefits of the deceased member. 

If income derived from the investment of the superannuation death benefits is in the future distributed to beneficiaries other than the member’s death benefits dependants, it is arguably the case that those income only beneficiaries of the SPT have not directly benefited and were not expected to benefit from the “superannuation death benefits” paid to the trustee of the member’s deceased estate, from the member’s superannuation interests.

Section 102AG

If superannuation death benefits are directed to be held upon an SPT, a further taxation advantage of such an SPT is that, if structured correctly, the punitive taxation rates for minors do not apply.  This is because, where a minor is in receipt of assessable income from an SPT, section 102AG of the Income Tax Assessment Act 1936 (“ITAA36”) provides that ordinary adult marginal rates apply to such assessable income. It is important that the particular requirements of 102AG are carefully considered to ensure that such concessional tax treatment for minor income beneficiaries is accessible.

An SPT can therefore also provide an opportunity for income to be distributed both in a tax-effective manner to minor beneficiaries of the SPT as well as provide for the tax-free treatment of death benefits under Division 302.

Asset protection advantages

Putting to one side the possible tax-planning associated with SPTs, an SPT may assist in quarantining assets of a beneficiary from potential claimants for bankruptcy and family law purposes. 

It may be possible to structure a trust (including an SPT) to mitigate Family Court claims.  Many advisors would be aware of the case of Kennon v Spry [2008] HCA 56, in which the High Court determined that the assets of a discretionary family trust were property of a matrimonial relationship. Broadly, this was found to be the case because of the level of control a party to the relevant marriage had in respect of the trust.  As part of structuring an SPT, it may be appropriate in the particular circumstances that such trust should not be controlled (as to 50% or more) by either of the relevant parties in a relationship.  In these circumstances, it may be more difficult for the Family Court to conclude that one particular beneficiary controls the trust, potentially exposing the assets of the SPT as property of the parties to a marriage.

Further, where an SPT is structured so as it is not considered to be controlled by a particular party, the assets of the SPT should not form part of the property of that party upon bankruptcy.   

Moreover, and significantly, the trustee in bankruptcy should not be able to compel the trustee of the SPT to exercise its discretion in favour of the bankrupt beneficiary, in order to access the assets of the SPT. However, if there is a corporate trustee for the SPT, care should be taken to ensure that a beneficiary who is at risk of bankruptcy does not hold the shares in the trustee.  This is an additional safety measure minimise the risk of the trustee in bankruptcy accessing the SPT assets.

It is for the above asset protection reasons that a member may still find value in establishing an SPT, even in the absence of obtaining any tax benefits under the ITAA97 as the member does not have any death benefit dependants.   

When not to use an SPT

While there are many advantages of an SPT, the structure should not be seen as a one-size-fits-all solution.  There are many circumstances in which an SPT is not a suitable option.   For instance, where a member only has one intended beneficiary of all their superannuation death benefits (such as a spouse) and no children.  Further, if the beneficiary is not at risk of bankruptcy or family law claims.  In these circumstances, there would not appear to be tax effective income splitting opportunities presented by the ITAA36, nor any immediate requirement for additional asset protection.

Summary

Whilst an SPT is a powerful and useful tool, it is important that advisers are aware of both the benefits of and the reasons why an SPT would not be used in light of a member’s particular circumstances.

By Nicole Santinon, Senior Associate and Joshua Pascale, Lawyer, Cowell Clarke