Estate Planning / Pensions / Professionals / SMSF

Death and Taxes with Super Benefits

There has been a significant amount of focus on the benefits of reversionary pensions since the ATO released draft tax ruling, TR 2011/D3.  The ruling considers the issue of where a pension will cease in the event of death where there is no automatic reversion to a beneficiary.  This reversion will only occur where either:

  • the terms and conditions of the original pension specify a reversionary beneficiary; or
  • a valid binding death benefit nomination exists (with explicit instructions to pay the benefit as a pension)

The ability to continue to pay an income stream to a tax dependant beneficiary will allow for the fund assets to continue to receive concessional tax treatment, rather than have to pay invest those monies outside of superannuation.

Whilst any amount paid as a lump sum to a tax dependant beneficiary is tax-free, regardless of age, the taxation of the benefit as an income streams is somewhat different.  Any taxation of the income stream being paid from the fund to a reversionary beneficiary (or tax dependant) will be based upon both the primary member’s age at death and the age of the beneficiary.

The table below outlines the different levels of taxation where a death benefit is paid as an income stream to a tax dependant:

It is important to remember that income streams can only be paid to tax dependant beneficiaries.  Non-dependants can only receive lump sum amounts, with the taxable components being subject to tax at 15% (taxed element) or 30% (untaxed element).

In addition, where an income stream is paid to a tax dependant child, the pension must cease at age 25, unless they have some prescribed disability).  At this time, the pension must be converted to lump sum and is paid as a tax-free benefit.

NB. According to the ATO website, the final ruling on when a pension commences and ceases (TR 2011/D3) is expected for release on 24 April 2012.

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