CLIENT UPDATE October 2009
Disability Superannuation Benefit; Webb v Teeling Summary The Australian Tax Office has released ATO ID 2009/108 which deals with the definition of ‘disability superannuation benefit’ in section 995-1(1) of the Income Tax Assessment Act 1997 (ITAA97). Paragraph (b) of that definition requires that two legally qualified medical practitioners have certified that, because of ill-health, it is unlikely that the person can ever be gainfully employed in a capacity for which he or she is reasonably qualified because of education, experience or training. In the case of Webb v Teeling handed down last week, the Federal Court dismissed an applicant’s appeal from a decision of the Superannuation Complaints Tribunal (SCT) regarding the distribution of a death benefit paid from a superannuation fund. This case is important for trustees and their advisers considering death claim allocations.
What is the issue? Let’s assume that a complying superannuation fund has a member to whom a benefit has been paid which meets the requirements of the ‘permanent incapacity’ condition of release in the Superannuation Industry (Supervision) Act 1993 and the definition of ‘disability superannuation benefit’ in ITAA. The question for trustees has been: For tax purposes, does the fund need to get separate certificates for further superannuation lump sums paid in respect of the same member?
The decision The ATO has decided that medical certificates given in relation to a particular superannuation lump sum can be used in relation to a later superannuation lump sum unless there is evidence to suggest to the trustee that the person’s circumstances have changed in some relevant way. In determining whether the person’s circumstances have changed in some relevant way, the relevant factors will include: •
the nature of the disability;
•
the period of time over which the lump sums are paid; and
•
whether there is any indication that the person has undergone any training or education.
Comment The decision in ATOID 2009/108 is based largely on the reasoning in Federal Commissioner of Taxation v. Pitcher [2005] FCA 1154; 2005 ATC 4813; (2005) 60 ATR 424 (Pitcher’s case). This case was a Federal Court decision addressing former section 27G of the ITAA 1936 which set out a medical certification requirement for invalidity payments. In Pitcher’s case, the Court said that it is the medical
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practitioners who must be satisfied of the person’s capacity to be employed in the future, but that the ATO can determine, as a question of fact, whether a particular certificate properly satisfies the test of incapacity. Under this decision, the ATO does not specifically require a trustee to actively seek out evidence that the member’s circumstances may have changed. However, it would be prudent for trustees to satisfy for themselves that the member’s circumstances have not changed before making subsequent payments, for example by seeking a statutory declaration to this effect from the member. Such a statutory declaration would include a statement to the effect that the member has not undergone any training or education since the decision of the trustee to make the first payment.
Case Summary WEBB V TEELING In the case of Webb v Teeling handed down last week, the Federal Court dismissed an applicant’s appeal from a decision of the Superannuation Complaints Tribunal (SCT) regarding the distribution of a death benefit paid from a superannuation fund. This case is important for trustees and their advisers considering death claim allocations. In the application to the Federal Court, the applicant was the daughter of the deceased member and one of the beneficiaries.
FACTS Following the death of the member, the trustee wrote to the potential beneficiaries advising its preliminary determination on the distribution of the death benefit which included an allocation to a nominated beneficiary, B. The respondent (the deceased member’s de facto wife) complained about the preliminary determination and requested the trustee to reconsider. Meanwhile, B died. The trustee responded to the complaint, but did not increase the amount of death benefit which the respondent was to receive. The respondent then complained to the SCT that, amongst other things, the trustee failed to ‘recognise her as a financial dependent and her future loss as (the deceased’s) de facto partner’. The SCT set aside the trustee’s decision and increased the proportion of the death benefit to be received by the respondent, thereby reducing the amount to be received by the other beneficiaries. The SCT also set aside the payment of a proportion of the death benefit to the estate of B.
FINDINGS OF THE COURT Date of Trustee’s Decision The date of the trustee’s decision in this matter was important because B died between the time of the trustee’s preliminary allocation and the date of the trustee’s purported decision. The Court held that the first letter from the trustee merely proposed a preliminary allocation which was not subject to any right of appeal, but rather subject to a right to make a complaint to the trustee. It was the
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second letter from the trustee which made the operative decision under the trust deed. Definition of ‘Dependant’ The applicant submitted that the SCT decision exceeded the scope of the SCT’s powers and therefore, that the SCT had erred in making its decision. The Court found amongst other things, that the SCT did not err in its decision in denying the deceased beneficiary a distribution. While the Court acknowledged that the trust deed required the trustee to consider who was a beneficiary at the time of the deceased’s death, it noted that reg 6.22 of the Superannuation Industry (Supervision) Regulations 1994 requires that a death benefit be paid for the benefit of a dependent.
COMMENT In holding that the first letter from the trustee merely proposed a preliminary allocation which was not subject to any right of appeal, but rather subject to a right to make a complaint to the trustee, the court effectively endorsed what is a common industry practice. The second letter from the trustee contained the operative decision under the trust deed, which is also common industry practice. Under the trust deed, ‘dependant’ meant: any person who in the opinion of the Trustee is at the relevant date (or in the case of a deceased Member was at the date of the death of the deceased Member) wholly or partially dependant financially on that Member.
The Court held that the power of the trustee to make a payment must be determined on the operative provisions of the trust deed and the legislation, specifically reg 6.22 of the Superannuation Industry (Supervision) Regulations 1994. In particular the Court held that: the trustee may only pay the benefit to the nominated classes including to or for the benefit of the dependants. A payment to a person’s estate after their death, as the Tribunal correctly acknowledged, is difficulty to reconcile with this requirement. To the extent that it involves ambiguity, the terms of the trust deed are to be construed as a whole in order to give effect to a harmonious scheme.
Therefore, while B was the member’s dependant at the time of the member’s death, the trustee did not have the power to make a payment to B’s estate. It only had power to make payments to or for the benefit of the dependants. Thank you to Helen Wang, Lawyer, TurksLegal for her contribution to the above case summary.
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For more information, please contact: Paul Cleary Partner Insurance & Financial Services TurksLegal T: 02 8257 5760 M: 0407 052 170 paul.cleary@turkslegal.com.au
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