Estate Planning / Professionals / SMSF / SMSF Strategy

Multi pension strategy gains more power

power-lifting

Understanding the benefits of the proportioning rule when it comes to commencing an income stream can provide significant tax savings, in particular at an estate planning level, where any residual money is ultimately paid to non-dependant beneficiaries.  There has however been a ‘cloud of uncertainty’ with what happens with multiple interests (i.e. pensions) when a member dies within an SMSF?  Did they go back to one superannuation interest in accumulation or do they remain separate interests?

The recent finalisation of Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 has provided tax certainty for superannuation death benefits on two fronts:

  1. through the continuation of a fund’s tax exemption beyond the death of the member (see previous blog post); and
  2. with an alternative method for determining the tax-free and taxable components of certain superannuation benefits

This method specified in new regulation 307-125.02 of the Income Tax Assessment Regulations (ITAR 1997) applies where:

  • a person (the deceased) was receiving a pension from their super interest immediately before their death;
  • the original terms and conditions of the pension did not automatically revert to another person on the deceased’s death;
  • no amounts other than investment earnings or an amount to fund an anti-detriment increase have been added to the relevant superannuation interest on or after the deceased’s death; and
  • after the deceased’s death, a superannuation death benefit lump sum is paid, and/or a new income stream is commenced, using only an amount from the relevant super interest.

The alternative method effectively will apply to the superannuation death benefit lump sum or pension benefit the same proportions of tax-free and taxable components as the superannuation income stream benefits that were paid to the deceased before their death.

This legislation now stamps a greater level of importance on the use of multiple pension strategies through the timing of contributions and re-contributions as part of members receiving income streams.

To understand, let’s take a look at the following example:

Josh was a member of his SMSF, receiving pensions immediately before his death on 1 May 2013.  Account Based Pension (“ABP”) #1 with $300,000 included 20% of tax-free component, with ABP #2, $300,000 being made up entirely of tax-free component (100% proportion).  There was no automatic reversionary beneficiary nominated to continue to receive the pensions after Josh has passed away.  No amounts were added to Josh’s account balances on or after his death.

The fund trustees determined that his death benefit would be paid as a lump sum equally to his children, Archie (20) & Tim (17).  The lump sum death benefit, in the amount of $600,000, was paid on 18 June 2013.  There was no increase in the lump sum death benefit by an anti-detriment amount and the benefit was not to any extent attributable to an insurance‑related amount paid or arising on or after the deceased’s death.  

As a result of this new measure, the trustee resolved to pay the super death benefit of ABP#2 to Archie and ABP #1 to Tim.  This is because each super interest retained the proportions in which the pensions commenced.  Given that Tim is classified as a tax dependant, the taxable component of ABP#1 is paid tax-free.

In the situation where an anti-detriment increase is to occur, the top-up amount is to be applied to the taxable component, not in the proportions of the originally commenced income stream of the deceased (between tax-free and taxable components).

This is great news! In my view, unless there’s an intention of the member to ‘spend the kids inheritance’ (SKI), multi-pension strategies have just grown in stature as one of the most powerful superannuation estate planning tools.

Comments

comments

5 thoughts on “Multi pension strategy gains more power

  1. Another benefit is when client withdraw more than minimum pension in the financial year, they can take from the pension account which has higher taxable portion provided they are over 60.

  2. Arron, a Q that you can probably answer easily.

    Josh has ABP #1 with say $1 (includes taxable and no-taxable), and ABP #2 with $200k (all non-taxable), and his min draw is 5%.

    Can Josh draw $60k from ABP#1 and zero from ABP#2 and meet the min draw down rules across both ABPs

    Is there any particular rule that defines how the min draw down has to be met in a multiple pension situation?

    Kind Rgds

    • Hi Colin,

      As each pension account must comply with the pension rules, the minimum is required from each account, not simply from a total across all of Josh’s superannuation interests within the fund.

      Cheers,
      Aaron

Leave a Reply