ATO / Estate Planning / Pensions / Professionals / SMSF / SMSF Compliance / SMSF Strategy / Trustee education

MYEFO provides relief on CGT and death benefits

Whilst much of the focus of the Mid-Year Economic and Fiscal Outlook (MYEFO) has been on the need to find dollars ensure the Labor Government delivers a surplus, the report has delivered some much-awaited news for the superannuation sector the final outcomes of the Commissioner’s views regarding TR 2011/D3, in particular when a pension ceases in the event of death.  It was the Commissioner’s view within the draft ruling that the pension would cease upon death of the member unless an automatic reversionary beneficiary existed.  This could only be achieved by having a reversionary beneficiary nominated at the commencement of the income stream or where it’s included within a valid binding death benefit nomination.

The superannuation industry was quite critical of the ATO view’s expressed within the draft ruling since it was issued in July 2011 and have been working closely with the ATO and Treasury to formulate an acceptable outcome… and here we are!!

In the MYEFO, the Government has stated that it will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund.  It will continue to require the fund to pay the member’s benefits as soon as practicable as already outlined within superannuation law.  In addition, the announcement states that it will also avoid the need for funds to rework tax calculations following the death of members in the pension phase.  This appears to provide certainty that where a member has more than one superannuation interest, (i.e. running multiple pensions) the benefits will not revert back to a single interest.  This ensures that much of the tax & estate planning benefits of running multi-pension strategies remain extremely valuable.

Lets take a look at the following example to understand the impact of this announcement:

Example

John (74) is the sole remaining member in his SMSF.  He has two SIS dependant beneficiaries, his adult children, Heath & Jill.  John’s account based is $1,000,000 and he is drawing an account based pension.  His fund receives tax exemption on the income from fund assets supporting the pension.  The current unrealised capital gain on the fund assets is $300,000.  John dies and his benefits are paid equally to his two children.  The payment occurs 2 months after John passed away, with all fund assets crystallised to cash.  According to draft ruling, TR 2011/D3, the pension would have ceased at the date of John’s death, with the subject disposal of fund assets being subject to capital gains tax within the fund at 10% (assuming a one-third discount applied having been held for more than 12 months).  The announcement in the MYEFO now outlines, that the fund’s tax exemption will continue beyond John’s death providing the disposal of fund assets to be exempt from tax.

These changes are to apply to the 2012-13 financial year and onwards.

This news is a great outcome for the superannuation industry!!

Comments

comments

4 thoughts on “MYEFO provides relief on CGT and death benefits

  1. Thanks Aaron,
    Seems like a common sense outcome.
    Is it therefore safe to assume that in the case of the typical husband and wife fund if one member dies the other could assume their pension(s) in this “period of grace” without the need for auto reversion arrangements? (subject to the wording of the trust deed of course)

  2. Pingback: The truth about SMSFs being mis-sold « brunofesta

  3. This all sounds fine until you check the Deed. What will happen when the Deed states the fund MUST return to accumulation mode upon the death of the member. I believe the Deed will take preference. This has been encountered in a fund and referred back to the accountant & trustees to seek legal advice.

    • Hi Eric,

      The simple fix to this would be a trust deed amendment to ensure that the governing rules are consistent with the SIS Regulations.
      I am surprised that the deed is so prescriptive regarding the application of what must happen. A well formulated deed would typically be more fluid in terms of legislative change.

      Cheers,
      Aaron

Leave a Reply