The use of anti-detriment within SMSFs as a strategy has been stymied over the past couple of years since the Australian Taxation Office (ATO) indicated that any allocation from a reserve for the purposes of paying this tax saving amount was to be counted as a concessional contribution. Subject to the amount of the allocation, and other levels of contributions, it appeared likely that this amount was going to incur excess contributions tax (ECT). As a result, the benefit of the strategy would be eroded by the potential excess contributions tax.
There has been some uncertainty within the industry about the amount to be included for the calculation of the anti-detriment tax deduction since the introduction of section 295-485 of the Income Tax Assessment Act 1997 (ITAA 1997). The old section 279D within the ITAA 1936 required the whole balance to be paid out as lump sum to qualify for the deduction. However, this didn’t necessarily appear to be the case when interpreting the new laws.
A question was raised at the March 2011 NTLG Superannuation Technical Committee meeting as to how much of a member’s account balance must be paid as a superannuation lump sum in order for a super fund to qualify for a tax deduction under section 295-485 of the ITAA 1997?
The good news from the ATO’s interpretation is that the tax deduction for the tax saving amount can be claimed on the amount paid out as a lump sum; it does not require the entire benefit to be paid out (as a lump sum). In other words, a member could receive a combination of income stream and lump sum and claim the deduction for the tax saving amount on the proportion paid as lump sum only.
To demonstrate this, let’s use the following example:
ANTI DETRIMENT example
Frank (58) recently died and was survived by his wife, Maria. He had a balance of $550,000 in his SMSF, in which Maria wishes to take a lump sum of $150,000, with the balance to be taken in the form of an account based pension.
From the above calculation, the tax saving amount is calculated as $72,056 on the entire benefit. As $150,000 has been taken as a lump sum, the proportionate tax saving amount is $19,652 (15/55 x $72,056). This would mean that an amount of $169,652 would be paid to Maria by way of lump sum. The SMSF would be entitled to a tax deduction of $131,013 ($19,652/0.15).
The ATO’s views expressed from the NTLG March 2011 meeting in my view brings anti-detriment right back into play as a key estate planning strategy for SMSFs. Whilst still having to consider the issue of allocations from reserves as concessional contributions, there appears now to be a greater scope for planning around the level of deduction that may be required within fund, rather than simply determining it based on the deceased member’s entire benefit. This deduction may be used to mitigate CGT or simply to benefit future generations of fund members.
Furthermore, there is greater scope to consider how the anti-detriment amount may be ‘funded’ within the SMSF without necessarily having to use reserves.
This positive news means all advisers dealing in the area of SMSFs should again turn their attention to how this strategy may benefit their client’s overall estate plan.
Register your interest to attend the SMSF Academy InPractice August Webinar on Anti-detriment and Future Liability to pay benefits. Free for SMSF Academy members, $77 for non-members. Details of this session to be announced shortly.