Superannuation death benefits

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1 Last updated: 7 September 2010 Last updated: 1 January 2011 Superannuation death benefits This TapIn Guide looks at the key tax issues relating to superannuation death benefits paid from a complying superannuation fund. We also cover the rules and strategies available regarding death benefit lump sums and pensions. Table of contents Beneficiaries...2 SIS dependants... 2 Death benefits dependant (tax dependant)... 2 Child... 3 Spouse... 3 Interdependency relationship... 3 Summary: SIS dependants and tax dependants... 4 Death benefit nominations... 5 Valid beneficiaries... 5 Death benefits to be paid to a SIS non-dependant... 5 Binding nominations... 5 Who can receive a death benefit as an income stream?... 7 Advantages of a death benefit income stream... 7 Commutation of a death benefit income stream... 8 Death benefit period... 8 Death benefit income stream paid to a spouse... 8 Death benefit income stream paid to children... 8 Taxation of superannuation death benefits... 9 Lump sum super death benefit paid to a death benefits dependant... 9 Lump sum death benefit paid to a death benefits non-dependant... 9 Death benefits paid to the deceased s estate Death benefit income stream Life insurance within superannuation - creation of untaxed element Anti detriment payment Re-contribution strategy Deduction to superannuation fund SMSF: Deduction for lump sum death benefit payment Related material TapIn Guide For planner use only Page 1 of 17

2 Beneficiaries As a starting point for any discussion around superannuation death benefits, it is crucial to have a good understanding of the superannuation definition of a dependant, who is a death benefits dependant for tax purposes and the interaction between the two. - A superannuation dependant is defined in superannuation law and governs who may receive a superannuation death benefit directly from a superannuation fund trustee. A superannuation dependant is also referred to as a SIS dependant. The superannuation law also governs the form in which a death benefit can be paid, i.e. lump sum or pension. - A death benefits dependant is defined by taxation law and governs how a lump sum death benefit is taxed. A death benefits dependant is also referred to as a tax dependant. SIS dependants SIS dependants include: The deceased person s spouse (including same or opposite sex de facto). The deceased person s child of any age. Any other person who was financially dependent on the deceased just before he or she died. Any other person with whom the deceased person had an interdependency relationship just before he or she died. Death benefits dependant (tax dependant) Upon payment of a superannuation death benefit, a fund trustee must determine whether the SIS dependant is also a tax dependant in order to withhold the appropriate amount of tax. The concept of a death benefits dependant is important as it determines how much tax a beneficiary will pay upon receipt of a superannuation death benefit. This tax treatment is discussed later. Tax dependants include: The deceased person s spouse (including same or opposite sex de facto) or former spouse. The deceased person s child aged under 18. Any other person who was financially dependent on the deceased just before he or she died. Any other person with whom the deceased person had an interdependency relationship just before he or she died. Any individual who receives a superannuation lump sum because of the death of another person where the deceased person died in the line of duty and was: a member of the Defence Force a member of the Australian Federal Police or the police force of a State or Territory, or a protective service officer (within the meaning of the Australian Federal Police Act 1979). TapIn Guide For Planner Use Only Page 2 of 17

3 Child For both a SIS or tax dependant, each of the following is a child of an individual: adopted child stepchild exnuptial child a child of the individual s spouse someone who is a child of the individual within the meaning of the Family Law Act. A child who has reached 18 years of age is a SIS dependant but is not a tax dependant unless they were financially dependant on the deceased just before the deceased died. There are some further exceptions that are noted in the relevant sections. Spouse For both a SIS or tax dependant, spouse includes: Another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple. Another person (whether of the same sex or a different sex) with whom the person is in a prescribed registered relationship under a law of a State or Territory. A former spouse is a tax dependant but is not a SIS dependant unless they were financially dependant on the deceased just before the deceased died. Spouse includes registered relationships In this State or Territory a Registered Relationship is a: defined under: ACT registered domestic relationship Civil Partnerships Act 2008 (ACT), s. 3 Tasmania significant relationship Relationships Act 2003 (Tas), s. 4 Victoria NSW relationship as a couple between two adults who meet the eligibility criteria for entry into a civil partnership. a relationship that is registered under this Act. Interdependency relationship Relationships Act 2008 (Vic), s.6 Relationships Register Act 2010 (NSW), s. 4 An interdependency relationship broadly requires two people to have a close personal relationship, live together and provide financial and domestic support and personal care. They may be exempt from some of these requirements if they do not satisfy the requirement because one of them suffers from a physical, intellectual or psychiatric disability. TapIn Guide For Planner Use Only Page 3 of 17

4 Summary: SIS dependants and tax dependants Spouse (including same sex) SIS dependant? Can death benefits be received directly as a lump sum? Can death benefits be received directly as an income stream? Tax dependant? De facto spouse Former spouse 1 Child under age 18 2 Child under 25 & financially dependant 2 Disabled child of any age 3 Child age 18 and over Financial dependant Interdependant Where the deceased died in the line of duty N/A N/A N/A Any beneficiary is a tax dependant Unless financially dependant on the deceased. Income stream must be commuted by the time the child turns 25. A disabled child age 18 and over will only be a tax dependant if also financially dependant, or an interdependant. TapIn Guide For Planner Use Only Page 4 of 17

5 Death benefit nominations A member may nominate a beneficiary or beneficiaries to receive their superannuation benefit on their death. Valid beneficiaries A valid beneficiary for a member s superannuation death benefit includes: one or more SIS dependants, and/or a legal personal representative of the deceased (the estate). The nomination can be non-binding or binding. Where a non-binding nomination is used, the trustee of the superannuation fund has discretion to pay the benefit to one or more SIS dependants, or to the deceased s estate. In contrast, a binding nomination which is valid at death must be followed by the trustee. If a superannuation death benefit is paid to the estate, it must be in the form of a lump sum and no tax will be withheld by the superannuation trustee. The trustee of the estate will be taxed on the payment according to the tax status of the ultimate beneficiaries of the will. Death benefits to be paid to a SIS non-dependant Where a member wishes their death benefit to be paid to a beneficiary who is not a superannuation dependant, this can be achieved by ensuring that the superannuation death benefit is paid to their estate and their Will is updated to reflect their choice of beneficiary. Typically, a binding death nomination in favour of the Legal Personal Representative is made for this purpose. The Will and binding death nomination should be reviewed regularly to ensure they continue to reflect the member s wishes. Binding nominations A valid binding death benefit nomination provides certainty by requiring a superannuation fund trustee to pay a superannuation death benefit directly to the member s nominated beneficiary in accordance with the member s wishes. Note that although the nomination binds the trustee as to who receives the benefit, the trustee will generally have discretion as to how the benefit is paid (i.e. lump sum or pension). The benefits of using a binding death benefit nomination include: - Certainty as to who will receive a superannuation death benefit. - The ability to distribute the benefit to a number of dependent beneficiaries in specified proportions. - Avoiding processing delays in paying the death benefits as there is no potential for an objection by a potential beneficiary. - Enabling the distribution of a deceased individual s assets in a tax effective manner. For example, an individual may choose to distribute superannuation assets to children under 18 and nonsuperannuation assets to adult children to minimise the overall tax liability. - Avoiding competing claims for the benefit from married, de facto and same-sex partners, children, and former spouses or partners including same sex partners. - Greater certainty where a member wishes to provide for a testamentary trust strategy via their Will. TapIn Guide For Planner Use Only Page 5 of 17

6 To be binding on the trustee of the superannuation fund, the nomination must be valid on the death of the member. To ensure a binding nomination is valid at death: - It must be in writing. - It must be signed and dated by the member, in the presence of 2 witnesses, each of whom has turned 18, and is not themselves a nominated beneficiary. - It must contain a declaration, signed and dated, that the nomination is signed in the presence of the 2 witnesses. - It must be less than 3 years old (binding nominations will lapse after 3 years unless the member confirms in writing that it has not changed). - All of the nominated beneficiaries (other than the legal personal representative) must be (SIS) dependants at the date of death. - All of the nominated beneficiaries must survive the member. Further, under the rules of a superannuation fund, a change in the member s circumstances may cause a binding nomination to become invalid and thus non-binding. For example, under AMP s superannuation products these circumstances include: - The member marries or enters into a de facto relationship after signing the binding nomination form. - The member gets divorced or ceases a de facto relationship after signing the binding nomination form. Example 1 Binding vs non-binding nomination Phil aged 55, has recently started a new relationship with Jenny age 35. They have moved in together and plan to marry later in the year. Phil has 2 adult children, Rebecca and John, from his previous marriage. Phil would like to leave all of his superannuation to Jenny (about $100,000). His children will be adequately provided for through his estate assets. He has expressed concern that his daughter Rebecca may make a claim to try to receive some of his superannuation assets. He would like to ensure that all of his superannuation passes to Jenny. If Phil makes a non-binding nomination, on his death Rebecca could apply to the trustee to make a claim against his superannuation assets. However, if Phil makes a valid binding nomination that situation would be avoided, as the trustee must pay all of the death benefit directly to Jenny. Rebecca will not be able to make a claim to the trustee to receive any of Phil s superannuation death benefits. Example 2 Binding nomination to estate Nicole is single with no dependants for superannuation (or tax) purposes. She wishes her death benefit to go to her parents on her death. Nicole effects a binding death nomination in favour of her legal personal representative and updates her Will to ensure her assets go to parents in equal shares. Provided that the nomination remains valid on her death, Nicole s death benefit will be paid to her estate and will be distributed according to her Will. TapIn Guide For Planner Use Only Page 6 of 17

7 Who can receive a death benefit as an income stream? Provided the trust deed and rules of the superannuation fund allow, an income stream can be commenced following the death of a member in the accumulation phase, or can be a continuation of an existing income stream of the deceased member. A death benefit income stream can only be paid to certain dependants, with special restrictions on payments to children. A death benefit income stream can be paid to: A spouse (including de facto and same-sex). A child of the deceased under age 18, or aged 18 to 24 (inclusive) and financially dependant. The income stream must be commuted by the day the child turns 25. A child of the deceased of any age where the child is permanently disabled. Any other person who was financially dependant on the deceased at the time of death. A person with whom the deceased had an interdependency relationship at the time of death. Advantages of a death benefit income stream The advantages of taking the death benefit as an income stream include: Potential for tax effectiveness: Tax free earnings - earnings within a superannuation income stream are tax free compared to an individual s marginal tax rate outside of superannuation, or a maximum of 15% in accumulation phase within superannuation. Tax free payments for the income payments from the death benefit income stream will be completely tax free, provided that either the deceased or the beneficiary is age 60 or over at the time of death. 15% tax offset for under 60 - where both the deceased and the beneficiary are aged less than 60 at the time of death, the taxable portion of income payments will be taxed at the beneficiary s marginal tax rate. However, a 15% tax offset will apply. When the beneficiary turns age 60, the income payments will become tax free. Retain access: Funds within a death benefit income stream are unrestricted non-preserved and can be accessed at any time. Note too that there is no maximum payment restriction on the income stream. Beneficiaries who are unable to contribute to superannuation (for example, age 65 or over and not working) can retain the benefit in the superannuation environment. No need to consider the contribution caps: By commencing a death benefit income stream, funds are retained within the superannuation environment and this can assist where contribution caps would otherwise be breached if the death benefit was taken as a lump sum and then recontributed to super. TapIn Guide For Planner Use Only Page 7 of 17

8 Commutation of a death benefit income stream If the death benefit income stream is commuted and cashed within the death benefit period, it will be treated as a death benefit lump sum and will be tax free to the death benefits dependant. Note that death benefit lump sums cannot be rolled over. If the death benefit income stream is commuted and cashed outside the death benefit period, it is treated as a standard superannuation withdrawal and taxed accordingly. The tax payable by the beneficiary will depend on the underlying components and their age. An exception occurs where a death benefit pension paid to a child is commuted. This will always be tax free and is discussed later. Death benefit period The death benefit period ceases on the later of: - six months after the death of the deceased person, and - three months after the grant of probate of the deceased person s will or letters of administration of the deceased person s estate although under certain circumstances, the death benefit period can be extended by the Commissioner. Commutation of death benefit income stream Timing of commutation Within death benefit period Outside death benefit period Outside death benefit period and commuted by a child under the age of 25 or permanently disabled Tax treatment of commuted amount Tax free Taxed as super lump sum according to components and beneficiary s age Tax free Death benefit income stream paid to a spouse Under the tax regulations, only a spouse can commute a death benefit income stream and roll the benefit to another superannuation fund (e.g. back to accumulation phase) or to another superannuation income stream. All other beneficiaries of a death benefit income stream can only commute the benefit to cash. Where a spouse wishes to commute and rollover the balance of the death benefit income stream back into accumulation phase, they will need to wait until the death benefit period has elapsed. The amount rolled back is excluded from the contribution caps. Whilst the amount rolled back will be unrestricted non-preserved, the earnings will be preserved. Note that where a spouse commutes a death benefit income stream outside the prescribed period to another income stream (e.g. to change provider), the income stream will no longer be viewed as a death benefits income stream. Consequently, the income stream will be taxed in the usual way and may create a tax liability for the client. Death benefit income stream paid to children Where an income stream is paid to a child of the deceased, the child will be required to commute the income stream by the time they reach age 25 and take the balance as a lump sum. This lump sum will be completely tax free and will not need to be included in the child s tax return, thus ensuring that there are no indirect tax consequences. TapIn Guide For Planner Use Only Page 8 of 17

9 Permanently disabled child An income stream payable to a child will only be allowed to continue beyond age 25 if the child is permanently disabled. The definition of permanently disabled requires that the child is suffering from a disability that: is attributable to an intellectual, psychiatric, sensory or physical impairment or a combination of such impairments, is permanent or likely to be permanent, and results in: - a substantially reduced capacity of the person for communication, learning or mobility, and - the need for ongoing support services. Rollovers of death benefit income streams paid to children not permitted It is important to note that the superannuation and tax regulations do not allow a death benefit income stream paid to a child to be commuted and rolled to another provider. Instead, any attempt to (even partially) commute the income stream will cause it to be cashed in full, tax free. Testamentary trusts for children From a tax perspective, commencing a death benefit income stream should be compared against alternatives such as paying the superannuation death benefit to the estate to establish a testamentary trust. Whilst income from a death benefit income stream may be tax-effective, a similar (or sometimes more flexible) result may be obtained by using the proceeds to establish a testamentary trust. Taxation of superannuation death benefits The tax treatment of a superannuation death benefit will depend upon whether the beneficiary is a death benefits dependant, the form in which the payment is received, and whether the payment contains an untaxed element. Lump sum super death benefit paid to a death benefits dependant A superannuation death benefit paid as a lump sum to a death benefits dependant will be tax free and will not need to be included in one s tax return. It is non-assessable, non-exempt income and will be received without indirect tax consequences. There is no time frame for a death benefits dependant to be able to receive a lump sum superannuation death benefit tax free. This means that even if there is a delay in the payment of the lump sum from superannuation (assuming no pension has been commenced), it will still be defined as a superannuation death benefit. Lump sum death benefit paid to a death benefits non-dependant Superannuation lump sum death benefits will generally consist of two components tax free and taxable. An untaxed element may also arise in untaxed funds and in taxed funds if the deceased had life insurance cover within their super (discussed from page 12). Under the proportioning rule, superannuation benefits (including death benefits paid to a nondependant) will need to comprise a mixture of tax free (if any) and taxable components. There will not be any flexibility to separately select and payout different components to different beneficiaries. TapIn Guide For Planner Use Only Page 9 of 17

10 Taxation of superannuation lump sum death benefit paid to a death benefits non-dependant Component Type of income Maximum tax rate Tax free Non assessable and non-exempt income Taxed element Assessable income 15%* Untaxed element Assessable income 30%* Nil * Medicare also applies, unless the benefits are received via the estate. Death benefits paid to the deceased s estate Superannuation death benefits can be paid to an estate due to: a valid binding death nomination in favour of the legal personal representative, the trust deed and rules of the superannuation fund, or the trustee of the superannuation fund exercising their discretion. Where a superannuation fund pays a benefit to the estate, no tax is withheld by the trustee of the superannuation fund. The tax treatment of the death benefit in the estate will depend on the end beneficiaries of the death benefit. A death benefit to be paid to a beneficiary who is a death benefits dependant is not assessable income to the estate. Therefore the estate has no tax liability on this benefit. Where a death benefit is to be paid to a beneficiary who is a death benefits non-dependant, the taxable and untaxed elements will be assessable income to the estate but will attract the maximum tax rates outlined on page 10 (no Medicare Levy is payable). Note that where a beneficiary subsequently receives a superannuation death benefit from the deceased s estate, there is no need for the beneficiary to include any part of this death benefit in their assessable income, as any tax liability rests with the estate. TapIn Guide For Planner Use Only Page 10 of 17

11 Death benefit income stream Where a superannuation death benefit is paid in the form of an income stream, the tax treatment will depend on the age of the deceased and the age of the beneficiary as outlined in the table below. Taxation of superannuation death benefit income streams Age of Deceased Age of Beneficiary Tax free component Taxable component Taxed element Untaxed element 60 or over Any age Tax free 1 Tax free 1 Assessable income taxed at marginal tax rate and subject to 10% tax offset Under 60 Under 60 Tax free 1 Assessable income taxed at marginal tax rate and subject to15% tax offset 2 Assessable income 3 Under or over Tax free 1 Tax free 1 Assessable income taxed at marginal tax rate and subject to10% tax offset 1 Non-assessable, non-exempt income. This ensures that it is always received tax free. It will not need to be included in one s tax return, and as such will be without indirect tax consequences. 2 When beneficiary turns 60, the super income stream will become tax free (non-assessable, non-exempt income). 3 When beneficiary turns 60, the untaxed element proportion is still assessable income, but beneficiary receives the 10% tax offset. Beneficiaries who are in receipt of death benefit income streams that commenced prior to 1 July 2007 are taxed as per the above table. Example 3 Death benefit to death benefits non-dependant Jeff, 55, commences a new account based pension on 1 July 2010 with $400,000. The components and proportions at commencement follow: Component $ % Tax Free 172,000 43% Taxable 228,000 57% Jeff elects to draw the minimum amount each year, and he dies at age 61, with an account balance of $380,000. Jeff has no spouse and his only beneficiaries are his children Laura (31) and Otis (29). They are both death benefits non-dependants and can only receive a lump sum upon Jeff s death. Assuming an even split between them, the components of the superannuation death benefits paid to the children are as follows: TapIn Guide For Planner Use Only Page 11 of 17

12 Example 3 Death benefit to death benefits non-dependant Laura and Otis each get $190,000: Gross $ % Tax $ Tax Free 81,700 43% nil Taxable 108,300 57% 17,870 The taxable component will be taxed at a maximum rate of 15% plus 1.5% Medicare Levy. In this case, Laura and Otis will each pay $17,870 lump sum tax on the superannuation death benefit. Note: Where a lump sum superannuation death benefit is paid to the deceased s estate and subsequently passed on to non-death benefit dependant beneficiaries, no Medicare Levy is payable. In our example, this represents a possible saving of 1.5%, or $1,625 each. Life insurance within superannuation - creation of untaxed element Life insurance held within superannuation creates an untaxed element in a lump sum death benefit. When paid to a death benefits non-dependant, this is taxed at a maximum of 31.5%. The amount of the untaxed element is calculated as shown below. In contrast, life insurance proceeds from a policy held outside of superannuation, paid to a nondependant are generally tax free. Therefore, if the end beneficiary of a superannuation lump sum death benefit containing life cover is likely to be a death benefits non-dependant (for example, parents receiving benefits following the death of their child), it may be better to hold the life cover outside of super. Calculating the untaxed element Work out the taxed element of the taxable component of the death benefit lump sum as shown in Step 1 and 2 as follows: Service days Step 1 Amount of entire superannuation lump sum x Service days + Days to retirement where: Days to retirement = Service days = Number of days from date of death to the deceased s last retirement day (usually age 65). Number of days from the start of the eligible service period in the fund to date of death. Step 2 Step 3 Reduce the above amount (but not below zero) by the tax free component (if any) of the death benefit lump sum. This will give you the taxed element of the death benefit s taxable component. Work out the untaxed element as follows: Superannuation lump sum tax free amount taxed element TapIn Guide For Planner Use Only Page 12 of 17

13 Example 4 Calculating an untaxed element (parents are beneficiaries of will) Luke, age 39 has accumulated superannuation of $160,000 (all taxable components) and life cover of $80,000 within his fund. He is single without dependants and, in the event of his death, wishes for his parents Don and Patricia to benefit from the superannuation proceeds. Luke passes away on 1 December The fund pays the accumulated superannuation balance of $160,000 and the attached life cover of $80,000 directly to his estate, providing a total death benefit of $240,000. The net proceeds will then be paid to Don and Patricia. Luke s date of birth is 2 August 1971 and his eligible service period in the fund commenced 28 February The taxed and untaxed element of the death benefit is calculated in accordance with the following steps: Step 1 Amount of entire superannuation lump sum x Service days Service days + Days to retirement = $240,000 x 6,486 (28/02/ /12/2010) 6, ,377 (01/12/ /08/2036) = $98,130 Step 2 Step 3 Reduce the above amount by the tax free component (if any) of the death benefit lump sum. There is no tax free amount in this case, so this step does not apply. Therefore, the taxed element is $98,130. This amount is taxed at 15% ($14,720). Work out the untaxed element as follows: Untaxed element = superannuation lump sum tax free amount taxed element = $240, $98,130 = $141,870 This amount is taxed at 30% ($42,561). Component Amount Tax rate (no Medicare Levy) Tax withheld Tax free Taxable (taxed element) $98,130 15% $14,720 Taxable (untaxed element) $141,870 30% $42,561 Total $240,000 $57,281 The total tax withheld on the death benefit paid to the estate is nil. The estate withholds $57,281 in tax on the payment made to Don and Patricia. We can note from the above example that the untaxed element of the lump sum death benefit is not correlated to the amount of insurance in the fund. In Luke s case, the untaxed element of $141,870 is actually higher than the insurance proceeds of $80,000. TapIn Guide For Planner Use Only Page 13 of 17

14 Wherever any amount of life insurance is held within super, an untaxed element will be calculated on the entire lump sum death benefit. If this is likely to be a problem, it may be worthwhile holding the life insurance cover in a separate superannuation fund or, where possible, outside super. Example 5 Calculating an untaxed element (paid directly to adult child) Sam, age 56 has accumulated superannuation of $300,000 ($50,000 tax free and $250,000 taxable) and life cover of $200,000 within his fund. He is a divorcee and, in the event of his death, wishes for his daughter Jessica to receive his superannuation benefit. Sam made a binding nomination directing Jessica to receive 100% of the benefit. Jessica aged 22, is financially independent, and therefore is not a death benefits dependant. Sam passes away on 1 January The fund pays the accumulated superannuation balance of $300,000 and the attached life cover of $200,000 directly to Jessica, providing a total death benefit of $500,000 (i.e. $50,000 tax free component and $450,000 taxable component). Sam s date of birth is 3 April 1954 and his eligible service period in the fund commenced 31 January The untaxed element of the taxable component of the death benefit ($450,000) is calculated as follows: Step 1 Amount of entire superannuation lump sum x Service days Service days + Days to retirement = $500,000 x 9,102 (31/01/ /01/2011) 9, ,015 (01/01/ /04/2019) = $375,588 Step 2 Step 3 Reduce the above amount by the tax free component (if any) of the death benefit lump sum. Taxed element = $375,588 - $50,000 = $325,588 This amount is taxed at 15% plus Medicare levy ($53,722). Work out the untaxed element as follows: Untaxed element = superannuation lump sum tax free amount taxed element = $500,000 $50,000 - $325,588 = $124,412 This amount is taxed at 31.5% ($39,190). Component Amount Tax rate Tax withheld Tax free $50, Taxable (taxed element) Taxable (untaxed element) $325, % $53,722 $124, % $39,190 Total $500,000 $92,912 The trustee withholds $92,912 in tax on the payment made to Jessica. TapIn Guide For Planner Use Only Page 14 of 17

15 Anti detriment payment In the event of death, some funds pay an extra lump sum amount to certain beneficiaries receiving a lump sum death benefit paid from either accumulation or pension phase. The beneficiaries who are eligible include: a spouse (including de facto and former spouse), and a child of any age (see ATO ID 2010/01). Where the death benefit is paid to a deceased estate, the anti-detriment payment may still be paid where it is reasonably expected that a spouse or child will receive the death benefit. An anti-detriment payment is not payable when an income stream is commenced from a death benefit. However, the anti detriment payment can be made when an income stream is commuted upon the death of the owner so long as the commutation proceeds are paid to a spouse or child and the governing rules of the fund permit this payment. The amount of the anti-detriment payment broadly reflects a return of contributions tax that the deceased member has paid. As such, the anti-detriment is calculated on the taxable component only, not on the tax free component or any insurance proceeds paid to the superannuation account on death. Anti-detriment payment formula A formula for the anti-detriment has been accepted by the Australian Taxation Office in ATO ID 2007/219* as follows: (0.15 x P) R - (0.15 x P) x C where: P = The number of days in component R that occur after 30 June R = The total number of days in the service period that occur after 30 June C = The taxable component of the lump sum (prior to the anti-detriment payment) less the insurance amount. * Also refer to ATO ID 2010/5. The amount of the anti-detriment payment increases the lump sum death benefit. Using the above formula, where a member s eligible service period in the superannuation fund is after 30 June 1988, the gross anti detriment payment will always be 17.65% of the taxable component (less insurance proceeds). The anti-detriment payment will be tax free or taxable depending on whether the member was in the pension phase or accumulation phase at the time of death. If the member was in the accumulation phase, the member anti-detriment payment forms part of the taxable component of the lump sum death benefit. If the member was in the pension phase, the anti-detriment payment will be in the same taxfree/taxable proportion as the pension. Re-contribution strategy A re-contribution strategy undertaken during the member s lifetime will potentially have a negative impact on any anti-detriment entitlement upon their death, as it reduces the taxable component of the death benefit. However, where the benefit will be paid to a death benefits non-dependant, the tax savings due to the re-contribution strategy are generally greater than the (net) anti-detriment payment. TapIn Guide For Planner Use Only Page 15 of 17

16 Unfortunately in many cases, it will not be known whether a member s superannuation benefit will, on their death, be paid to a death benefits dependant such as a spouse, or a death benefits nondependant such as an adult child (e.g. where the member s spouse predeceases the member). Therefore one cannot generally be sure whether undertaking a re-contribution strategy will improve the net death benefit to the beneficiaries. Deduction to superannuation fund The payment of the anti-detriment amount on the death benefit provides the superannuation fund with a deduction again future assessable income. The deduction is equal to the extra lump sum divided by 15%. SMSF: Deduction for lump sum death benefit payment Generally a SMSF will be unable to pay an anti-detriment payment on a death benefit unless a reserve has been specifically established for this purpose. This also means the SMSF cannot take advantage of the deduction available to the fund where an anti-detriment payment is made. However an alternative strategy to gain a deduction is available where the superannuation death benefits include life cover proceeds. In the year in which a death (or disability) payment is made, the trustees of the SMSF can elect not to claim the premiums as a tax deduction and instead claim a deduction based on the lump sum death benefit payment amount. In the case of lump sum death (or disability) benefit payments, this election only applies in the case of employed members. The effect of this election is that the fund claims a deduction in the year in which a death (or disability) benefit payment is made. The deduction is calculated in accordance with the formula below, and broadly represents the period where the person would have expected to have been employed. Deduction for super fund paying a superannuation death benefit to an employee Deduction = Benefit amount x Future service days Total service days where: Benefit amount = Future service days = Total service days = Amount of the lump sum or value of pension payable. Number of days from when the member terminated employment or ceased gainful employment in the case of temporary disablement, to the members last retirement date (usually age 65). Number of days from the start of the eligible service period until the member s last retirement date. Example 6 Deduction for lump sum death benefit payment Jack has been a member of his SMSF for 10 years when he died age 40. After adding the insurance cover of $1 million to his $1.1 million accumulation, the trustee provided a death benefit of $2.1 million. Instead of claiming a tax deduction for the premiums payable that year, the fund trustee can elect to claim a tax deduction under these provisions as follows: = $2.1 million x 25 years of future service 35 years of total service = $1.5 million TapIn Guide For Planner Use Only Page 16 of 17

17 A tax deduction of $1.5 million will likely create a tax loss for the superannuation fund. The amount of the loss can be carried forward and claimed against the fund s taxable income in future years. Because the deduction will continue to be carried forward until it has been used, there is the possibility that the deduction could eliminate all income tax payable for many years. Unless the ATO applies its discretion, the election not to claim premiums as outlined above continues to apply in all later years. This means that the trustee can no longer claim any insurance premiums in respect of any members of the fund on a yearly basis again. Related material TapIn Guides provide a comprehensive technical reference on specific advice areas. There are various guides available and these can be located on Planner Portal at Resources Advice & technical Reference materials TapIn Guides. Disclaimer The information provided in this edition of the TapIn Bulletin is believed to be accurate and reliable as at 1 January 2011 and is of a general nature only. It is for professional planner use only it is not to be distributed to clients. It is provided by AMP Life Limited ABN AMP Life is not responsible for any errors or omissions. Produced by TapIn For technical enquiries call the TapIn Help Centre on TapIn Guide For Planner Use Only Page 17 of 17

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