Death and Taxes with Super Benefits

April 11, 2012 By Leave a Comment

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.

Filed Under: Estate Planning, Pensions, Professionals, SMSF Tagged With: , , , , , , , ,

SMSF Year End Planning Strategies

March 14, 2012 By 2 Comments


With the end of the financial year fast approaching, it provides an important time for SMSF trustees to consider a range of year-end planning strategies for their SMSF.

The following list provides some ideas, issues, and strategies around contributions, pensions, investments and estate planning that you should be reviewing to maximise the opportunities leading up to 30 June:

Contribution strategies

  • As we end the transitional period for concessional contributions for those aged 50 and older, it is important to maximise contributions up to concessional contribution cap in this last year before the cap reduces to $25,000p.a.
  • With a proposed extension to the concessional contribution cap for those aged 50 with less than $500,000, it is important to consider the value of contribution splitting moving forward.  Splitting from the primary working spouse to the non-spouse has the ability to add several years of additional concessional contributions to the fund.
  • Think about the timing of your non-concessional contributions for a member leading up to age 65.  Remember that you can trigger the ‘bring forward’ rule at age 64 to contribute $450,000 without meeting the work-test beyond age 65.
  • It is important that you check for amounts that may form a superannuation contribution in accordance with TR 2010/1, such as expenses paid for on behalf on the fund, debt forgiveness or in-specie contributions.
  • Certain allocations from reserves will also count as concessional contributions for the year, in particular where excess concessional contributions from the previous financial year are to be allocated
  • If using a contribution reserve in June this year, remember that the amount should not exceed $25,000, unless the member is age 50 or older and has an account balance of less than $500,000.
  • Consider any off-market share transfers into SMSFs as the window to undertake an in-specie contribution closes at 30 June 2012 as a result of the Stronger Super recommendation to require the assets to be bought and sold on an underlying market.
  • Where a member may have excess concessional contributions for the current financial year, they may wish to use the ‘once-off’ refund.  However, you need to consider not only the marginal tax rate impact, but also consider issues such as Family Assistance Office entitlements (e.g. family tax benefit and child care amounts), plus any child support and even the flood levy.
  • Make sure of any notice of ‘intent to claim a tax deduction’ is valid for member contributions, in particular where a member may have started an income stream.  The notice must be signed and dated prior to the income stream having commenced.
  • Spouse contributions can provide the person making the contribution (on behalf of their spouse) to be entitled to a tax offset of up to $540 (18% tax offset on first $3k), where the spouse receiving the contribution has assessable income plus reportable fringe benefits totalling less than $10,800.
  • Take advantage of the co-contribution.  Where an individual’s income for the financial year is below $31,920, they will receive a $1 for $1 benefit up to $1,000 from the Federal Government.  Those whose income falls between this lower-income amount and $61,920 (upper threshold) will be entitled to a pro-rata co-contribution amount;

Missed the SMSF Year End Planning Webinar?  You can watch it here and get SPAA and/or FPA CPD points

Pension Strategies

  • In light of the views expressed by the Commissioner in TR 2011/D3, it is imperative that you ensure members have taken their minimum pension for the financial year.  Failure to take the minimum will result in the pension ceases at the start of the financial year (no tax exemption) and having all amounts taxed as lump sums.  With benefit moving back to accumulation, this could also impact any planning previously completed with multiple pensions.
  • Where a member is under age 60 and have unrestricted non-preserved benefits, consider whether they would be better partially commuting the pension and electing to take a lump sum, which counts toward their minimum pension for the financial year.
  • Review your pension clients to ensure that they have reversionary beneficiaries nominated.  TR 2011/D3 outlines some important consideration where a pension ceases upon the death of a member.  The Commissioner states that only where a reversionary beneficiary exists or a where a valid binding nomination is in place that a pension will not cease.

Investment considerations

  • Consider optimising the fund’s overall capital gains tax position – look to utilise any capital losses through realising capital gains (or conversely realise capital losses where the fund has capital gains for the financial year);
  • Review the capital gains/loss positions of the fund for the financial year to determine the whether the segregated or unsegregated method is most appropriate.  Where the segregated approach is used, all capital gains and losses are disregarded; with the unsegregated approach, capital losses can be carried forward.
  • Make sure the fund’s investment strategy has been reviewed and that the fund is acting in accordance with it.

Estate planning considerations

  • Ensure that any existing death benefit nominations are valid.  It provides a timely message to review any potential changes to your total estate plan, including Wills and Powers of Attorney;
  • Do you have an appropriate enduring Power of Attorney in place in the event incapacity?
  • Have you considered planning for the use of an anti-detriment payment in the future to claim a deduction when a member passes away?  This tax saving amount can provide a significant benefit to reduce the impact of any capital gains tax.

Finally, you need to ensure the fund’s activities have been appropriately documented (i.e. minutes) and are in accordance with the fund’s investment strategy and governing rules.

Whilst providing an extensive list of things to consider, it is by no means exhaustive.  There are a myriad of opportunities whether you are accumulating or drawing down an income stream, so it provides an opportune time to get some advice and take advantage of the year-end planning strategies.

Filed Under: Contributions, Estate Planning, Pensions, SMSF, SMSF Strategy, Trustee education, Webinars Tagged With: , , , , , , , , ,

SMSF Year End Planning Webinar

February 29, 2012 By Leave a Comment

As we approach the end of the financial year, it is important to focus on the various planning opportunities that are available for members of self-managed super funds.  As both trustees and the broader SMSF industry place a greater focus on the quality advice, being able to effectively deliver strategies in the lead up to 30 June is crucial.

In this session, I will be exploring various contribution and pension strategies leading up to 30 June, along with a range of investment and estate planning considerations that are vital as part of your clients year-end and ongoing planning.

FIND OUT MORE AND REGISTER HERE

Filed Under: Contributions, Estate Planning, Investments, Pensions, Professionals, SMSF, SMSF Strategy, Webinars Tagged With: , , , , , , , ,

Can you establish a reversionary pension after a pension has commenced?

November 28, 2011 By 5 Comments

The impact of  ATO draft tax ruling, TR 2011/D3 has sparked a significant amount of interest in how income streams are structured for SMSF members, in particular with those who have not originally included a tax dependant reversionary beneficiary in the original terms & conditions of the pension.  The draft ruling states that a pension will cease upon the death of the member unless a:

  • reversionary beneficiary has been included within the original terms & conditions of the pension; or
  • valid Binding Death Benefit Nomination (BDBN) existed.

There is some debate within the industry as to which take precedent? A reversionary pension or a valid binding death benefit nomination (BDBN)?  Industry views vary based on some of the following arguments:

  • The is a view that reversionary pension documentation is not actually binding on the trustee?  If the reversion is not binding, the argument is that the BDBN is therefore more likely to bind the trustee and take precedence over the reversionary pension;
  • A valid reversionary pension will override the BDBN because the act of reversion automatically transfers the pension to the reversionary beneficiary.  A BDBN cannot apply because no death benefit arises; and
  • A BDBN will not be effective where making the pension reversionary (i.e., because it represents a fundamental change to the terms & conditions of the pension).

According to the Australian Taxation Office, as outlined within the minutes of the March 2010 NTLG Superannuation Technical Sub-group:

“There are no SIS Act or SISR provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death.  

While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3, the Commissioner is of the view that those provisions do not have any application to SMSFs. It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust. 

 “If the governing rules of a SMSF authorise a death benefit nomination, the trustee must follow the fund’s rules and the general trust law and any other legislation which may be relevant.

 Notwithstanding those observations, the ATO’s view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner. It is only where a trustee may exercise its discretion as which beneficiary is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.”

Comments made within these ATO NTLG Super Sub-group technical minutes as outlined above state that a reversionary beneficiary must be nominated at the commencement of the income stream.  It is a requirement for a reversionary beneficiary to be specifically identified at the time the pension commences.   Currently we have no further guidance (nor law) from the Commissioner on this issue.  There are a range of pensions-related matters including exempt current pension income (ECPI) that the ATO is currently considering to provide further guidance on.

I’ve setup a pension with no reversionary beneficiary, how can I change this?

I see many SMSF pensions established without a reversionary beneficiary.  Much of this has to do with either:

  • the legacy of the RBL system whereby the majority of pensions had no reversionary – this was predominantly due to lower deductible amounts (the tax deduction was lower as the deductible amount was calculated on the longer life expectancy, typically the wife); or
  • a lack of understanding around pension-related matters (competency).

You cannot simply add to or amend the original pension documentation to include a reversionary beneficiary.  It is my belief that the pension must cease (rollback / full commutation) and then a new income stream be commenced.  

If the fund is running multiple pensions for a member, you do need to consider the timing of when to rollback these pensions.  Remember that a SMSF member when in accumulation can only have one superannuation interest (i.e. the components of the multiple pensions will amalgamate back into one), so you do not want to ‘contaminate’ any high tax-free proportion income streams.

If you want to rely on a binding death benefit nomination for the pension to revert, you must meet some very strict requirements in the form and substance with which this nomination form must take…  In my view, making amendments to an existing income stream seems like a simpler way to go.

Find out more about this topic in the SMSF Pensions Webinar – last chance to register

Filed Under: Estate Planning, Pensions, Professionals, SMSF, SMSF Compliance, SMSF Strategy, Trustee education Tagged With: , , , , , , , , ,

Be aware of rolling over death benefit pensions to SMSFs

November 23, 2011 By 1 Comment

I had an interesting question raised via a financial adviser last week regarding a death benefit pension being paid to a member under age 55 who wished to transfer this to a SMSF.  I thought I would share with you the important implications of this decision.

John (52) passed away and is survived by Jane (48).  His super benefit resides in a retail super fund, with the proceeds of the life insurance to be paid to John’s account and applied as part of a death benefit pension for Jane.  There has now been a suggestion to transfer Jane’s death benefit pension to a SMSF.  What are the  consequences (if any) of Jane transferring the benefit?

In the event of the death of a member, where a tax dependant exists, such as a spouse, the beneficiary has the right to receive the benefit in the form of a lump sum, pension or combination of both (subject to the governing rules of the fund).  Depending on the age of the deceased member, there are different tax consequences where the benefit is taken as an income stream.  The table below outlines this:

Age Taxable Component  (taxed element) Taxable Component (untaxed element)
60 and above 0% – Non-Assessable, Non-Exempt (NANE) Income MTR less a 10% tax offset
Preservation age* to 59 MTR less a 15% tax offset MTR (no tax offset)
Below preservation age* MTR (no tax offset) MTR (no tax offset)

However, where the amount is commuted and rolled over to another complying superannuation fund (including SMSF), the character of the superannuation interest (being a death benefit pension) ceases.  The benefits are still unrestricted for the member or beneficiary, however any income stream taken will simply apply against the account based pension rules and be ineligible for the 15% tax offset.It is important to note that the 15% tax offset also applies under preservation age* to a member where a disability super benefit is paid or to a beneficiary of a deceased member receiving a death benefit pension.

It is therefore important that you understand the potential impact of switching benefits as it could have a significant tax impact.

Learn more about this and other pension issues and strategies in the SMSF Pensions Webinar on Tuesday, 29 November

* Preservation age 

Date of birth

Preservation age
Before 1 July 1960

55
1 July 1960 – 30 June 1961

56
1 July 1961 – 30 June 1962

57
1 July 1962 – 30 June 1963

58
1 July 1963 – 30 June 1964

59
From 1 July 1964

60
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Filed Under: Estate Planning, Pensions, Professionals, SMSF, Trustee education
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