Estate Planning / Pensions / Professionals / SMSF / SMSF Compliance

Certainty on tax exemption with super death benefits

tax-exempt

The previous announcement by Government to provide tax certainty for deceased estates had been widely applauded by the super industry.  The MYEFO announcement remedied the Commissioner’s views contained within controversial draft Tax Ruling TR 2011/D3 that stated a pension would cease at the member’s death unless automatically reverting to a tax dependant beneficiary.  These measures contained within Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 were recently registered, allowing for these changes to take effect for the 2012/13 financial year.

The new measures will expand the meaning of superannuation income stream benefits for the purposes of section 295-385 and 295-390 of the ITAA 1997, allowing for the fund to continue to claim tax exemption on earnings for a specified period.  This specified period is from the death of the member until the death benefit has been paid as a lump sum or income stream.  This must be paid as soon as practicable.

Importantly, the tax exemption will not apply on any amounts added to the member’s benefit through insurance policy proceeds or via self-insurance.  This effectively means that the continuation of the tax exemption will only apply on value of the superannuation interest at death, adjusted for any investment earnings.  This is to ensure that the level of the exemption for the relevant period after the member’s death is no greater than it was before their death (allowing for investment earnings after the member’s death).

To understand how this legislation will work, let’s take a look at a couple of examples:

Example 1

Geoff was receiving a superannuation income stream from his SMSF immediately prior to his death on 15 January 2013. There was no reversionary beneficiary of the income stream and no amounts (other than investment earnings) were added on or after his death to his superannuation interest that was supporting the pension.  His wife Val, decides to take the death benefit as a lump sum.  On 4 June 2013, which was in the circumstances as soon as practicable after Geoff’s death, a single lump sum of $300,000 was paid to the Val, which did not contain any additional insurance policy proceeds.   For the purposes of the earnings tax exemption, $300,000 will be taken to be the amount of the superannuation income stream benefit that was payable from 15 January 2013 until 4 June 2013.

Example 2

Using the same facts with Geoff in the example above, however as part of the lump sum payment, the trustees decide to pay an anti-detriment amount of $30,000, in addition to the $300,000 lump sum.  The amount of $300,000 will be taken to be the amount of a superannuation income stream benefit that was payable from 15 January 2013 until 4 June 2013 (as $30,000 of the superannuation lump sum is attributable to an amount other than investment earnings that was added to the relevant superannuation interest on or after Geoff’s death).

With benefits required to be paid out as soon as practicable, it is not uncommon that a death benefit payment may be made as an interim and final payment.  The legislation allows for tax exemption to continue through until the final death benefit has been paid.  Furthermore, with multiple beneficiaries to receive superannuation death benefits, the tax exemption will be calculated on each beneficiaries’ entitlement through until the benefit has been paid (whether paid as a pension or lump sum).

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