Emailed Instantly

Click here for our Price List

Second to the family home, superannuation is perhaps the next biggest asset for most Australians primarily because of a combination of insurance and compulsory super guarantee accumulations over the lifetime of a person.

Since superannuation is a concessionally taxed vehicle for investments and also provides important asset protection advantages, it is common for superannuation fund members to die with large balances.

Despite it all, and the fact that death is an inevitable event, not enough attention seems to be focused on planning for death. Given its significance, it is imperative that a sound will or a water tight estate planning strategy is executed at a relatively early stage. The importance of death benefit planning in a SMSF context is thus very crucial.

What is a ‘death benefit’?

The term ‘superannuation death benefit’ is defined in section 307-5 of ITAA 1997.  Amongst other things, it defines a ‘superannuation death benefit’ as:

 ‘A payment to you from a superannuation fund, after another person’s death, because the other person was a fund member.’

 Section 307-10 then sets out a list of payments which are not considered ‘superannuation death benefits’.   

Further, regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) provides that a trustee of a regulated superannuation fund is required to cash a member’s benefit as soon as practicable after a member’s death.  Except if there is an effective death benefit nomination, the superannuation fund’s trustee has discretion as to which dependents it should distribute a deceased’s benefit. 

When should death benefit be paid?

Death is the only known compulsory cashing event in super. SIS Sub regulation 6.21(1) provides that ‘… a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies. ‘The regulation does not define any prescribed time in which a death benefit must be paid.  All that is required is that the payment must be made as soon as practicable after death.

For instance, if the fund had an indivisible asset such as real property and a general market downturn regarding real estate made the trustees “wait for a bit longer” for a market correction, this kind of reason would not, in an advisors view, satisfy the “as soon as practicable “definition of SIS Regulation.

How to pay a death benefit?

Death benefits must be paid out to death benefit beneficiaries of the deceased member, SIS Regulation 6.21 makes death a compulsory cashing requirement.

Recently, the ATO has issued an interpretative decision on the specific issue of paying a benefit by way of journal entry via ATO ID 2015/23.

The facts of the case were as follows:

• Husband and wife were two members of the SMSF;
• The husband died and the deceased member’s benefit was to be paid to the surviving spouse as a lump sum, who was the remaining sole member of the fund;
• To avoid unnecessary transaction fees, the surviving spouse wanted to re-contribute the death benefit to the fund by way of journal entry.

The ATO determined that payment of the death benefit by way of journal entry did not satisfy the requirements of Reg. 6.21 SISR; that is, the journal entry record of payment of the benefit does not satisfy the Tax Act and SIS Act death benefit payment requirements.

Consequently, the fund would either have to realize fund assets to fund the death benefit, or, alternatively, transfer fund assets in-specie to the beneficiary. The beneficiary could then re-contribute the benefit, in-specie or otherwise, subject to the contribution rules and taking into consideration contribution cap amount.

Who can receive a death benefit?

Regulation 6.22 of SISR 1994 provides that a payment from a superannuation fund in consequence of the death of a member can be paid either:

1. Directly to a beneficiary; or

2. To the executor of the deceased’s estate or a trustee of a testamentary trust, with the amounts then paid to a beneficiary as a distribution from the estate or the trust.

Death benefit payments: Lump Sums and / or Income Stream

Broadly speaking, death benefits can be made in two forms:

• Lump Sum payments
• Income streams payments

As a general rule, on death of a member, the fund trustee will be able to pay a death benefit to a tax dependent as a lump sum payment, an income stream, or a combination of the two. 

However, the trustee would need to pay heed to the following:

• The terms of the trust deed. For example, some trust deeds state that if a BDBN is not in place at the time of death, the benefit must then be paid to the estate. Clearly, trustees here are not permitted to pay death benefit pension where a Binding Death Benefit Nomination has been completed.
• The terms used in the establishment of the pension-for instance, is the pension reversionary or not?
• The terms of any death benefit nominations.
• Please note with the new rules as announced in the 2016 budget, limiting non-concessional contributions to life time contribution of $500,000 - when a death benefit is paid out of super as a lump sum to a dependent - it may not be possible for the dependent to re-contribute it back to concessionally taxed super environment.  
• If SIS Act allows a payment of a death benefit as an income stream does not mean that every SMSF may be allowed to pay a death benefit as an income stream - it all depends on what the trust deed terms allows the trustee - it is very important to check the terms of the trust deed of the fund - if death death can or cannot be paid as an income stream.

Our SMSF trust deed allows the trustee to pay a death benefit as an income stream to eligible dependents, to update your deed, click here 

Lump Sum Payments

Lump Sum can be paid to dependents-spouse, child on any age, inter-dependent relationships and financial dependents or to the estate.

The concept of financial dependents and interdependent relationship may also include brothers, sisters or even grand-children’s in certain cases as we shall see later. These categorizations are particularly important, given that, the crucial definitions would mean the streaming of death benefits either tax free or in taxable form.

Sub regulation 6.21(2) of the SIS Regulations further provides that a lump sum must not be paid in more than two installments.  Further, there are limitations with respect to the payment of income streams.

Also, it is important to note that the Low rate cap is not applicable on super death benefits. Consequently, any taxable component (most concessional contributions and income of the fund) paid to non-dependents will be taxed in the hands of the beneficiary.

The trustee of the fund must withhold tax before payment.

How are Lump Sum Death Benefits taxed?

Lump sum payments received by a tax dependent is always tax-free (Section 302-60 of the ITAA 1997) irrespective of whether it is paid from the fund or the estate.  The amount is treated as non-assessable non-exempt income of the dependent.

However, if a lump sum is paid to a non-dependent, then the tax free component will not be subject to tax (see s 302-140 of ITAA 1997), but the taxable component of the lump sum is included in the recipient’s assessable income with a tax offset to ensure that the rate of tax on the element taxed in the fund does not exceed 15% and that the rate of tax on the element untaxed in the fund does not exceed 30 % up to a specified limit(Section 302-145 of ITAA 1997) effectively capping the tax on lump sum to a maximum of 30% as shown in the table.

Super benefits paid from untaxed super schemes contain an untaxed element where NO contributions and earnings tax have been paid such as those run by the Federal Government and State and Territory governments. These generally apply to public servants, and fall into two broad categories, public sector super schemes and constitutionally protected funds.

Taxation of Income Stream Payments

For superannuation income streams (pensions), the taxation implications depend on the age of the recipient (either original deceased super interest holder or dependent) Section 302-65 ITAA 1997 states:

• For instance, - if the deceased who owned the income stream was over the age of 60, then anyone who held the income stream subsequently would also receive the income tax free.
• Similarly, if the original pensioner at the of death was under 60, but the dependent of the deceased was over 60, the income stream would flow tax-free to the dependent.

If, however, both the deceased and the dependent are under the age of 60 at the time of death, then the benefit will be taxed as follows:

1. The tax-free component is received tax-free.
2. The taxable component is assessable; taxed at marginal tax rates with the amount of tax payable reduced by a 15% tax offset.
3. The entire income stream benefit is received tax-free once the recipient turns 60, provided it does not have an untaxed element.
4. If there is an amount untaxed in the fund, the treatment is then the marginal tax rate less 10% offset (but not applicable if both the deceased and the recipient were under the age of 60).

Only tax dependents can be paid an income stream (SISR 1994 Reg. 6.21 (2A). In the case of non-dependents, since they are unable to receive a superannuation income stream, if the deceased member is on an income stream, such income streams must be commuted first, and paid to the non-dependent as a lump sum.   This means that children over 25 cannot withdraw pension (unless they are permanently disabled) (Reg. 6.21 (2A) SISR 1994). Commutation before the child reaches the age of 25 years means that the lump sum can be paid tax-free pursuant to s303 ITAA 97.

If the child is permanently disabled, the pension need not be commuted at the age of 25 (Reg. 6.21 (2A) SISR 1994). Rather, the parent or guardian has an opportunity to shelter the assets in a low tax environment. In this case the benefits of a superannuation pension for a disabled child are:

• The income from the assets supporting the pension is tax-free.
• The pension paid to the child as a result of death will be subject to income tax at marginal tax rates less a 15% tax offset. Further, when the child reaches the age of 60 years, it will be received tax-free.

Your take from this discussion

1. Lump sum death benefit paid to a dependent is tax free

2. Income stream death benefit paid to a dependent is taxable to the dependent if the dependent is under 60 years if the member was under 60 years at the time of death

3. A child is no longer a dependent after the age of 25, unless the child is disabled.

For an advisor and dependent, it is important to understand that there are time limits, after death, to decide on how they want to take the death benefit.

For example, when the spouse receives a death benefit pension, they can only elect to convert the income stream to an death benefit lump sum within the prescribed period. Generally, the prescribed period is the latter of:

• six months after date of death, or

• three months after grant of probate or letters of administration.

The prescribed period may be extended if there have been delays in making the benefit payment due to legal action, identifying defendants or if the Tax Commissioner determines that a longer time period may apply.

If a death benefit income stream is converted to a lump sum outside of the prescribed period, it will no longer be treated as a super death benefit. It will be a life benefit and tax concessions may be lost.

Free Technical Webinar

2 of 3 Part Series : Planning for Death in a SMSF

"Issues to consider" 

Superannuation is increasingly becoming a contentious area for estate litigation and death is perhaps the only constant in one’s life. But despite this, not enough attention is focused on planning for death.

This webinar is second of a three part series on Death Planning. In this introductory webinar, we will discuss mainly-

• Death benefit Planning Tools in an SMSF: BDBNs, reversionary pensions & SMSF Wills
• The importance of the trust deed and what can go wrong
• Case law to discuss planning loop holes

Speaker : Agni Chowdhury

Agni has Masters in Accounting from Macquarie University and is a CPA SMSF Specialist Member. He has worked in SMSF space for over 6 years dealing with complex trustee issues. He has a special interest in actuarial certificates and their use in the proposed limiting pension balance of $1.6M post 1st July 2017.

-------------------------------------------------------------------------------------------------------------------------------------------

Which new rules will result in Government receiving some of your super after you die?

In 2016 budget the treasurer Scott Morrison announced that provisions will be made in superannuation law where maximum lifetime limits will be placed on individuals to limit how much they can contribute to super after tax (non-concessional) in a lifetime.

From the budget night this limit will be $500,000 instead of current limitless non-concessional contribution of $180,000 per year.

If this announcement becomes law, then it is possible that more than 1/6th of taxable component of any superannuation interest on death is paid in tax by a members non dependent beneficiary upon death of the member.

Some advisors are calling this new tax as "death tax" and reminding clients that Self Managed Super Fund should not be the only tax and wealth accumulation vehicle used to pass on to the next generation and advising clients to consider other time tested alternatives like family discretionary trusts etc.

To understand this new death tax let's look at an example:

Michael is 67 years old. He commenced a pension at the age of 57 when he quit work in year 2006. Margaret, his wife died four years back. He has a daughter and a son. His daughter Jane is 43 years old and Peter is 36, both are working married with kids (non-dependents for tax purposes).

Michael currently lives in his own home and is very active and works 4 hours three days a week at a friend's pizza shop. At the time of commencement of pension in his self managed super fund, he had $650,000 block of units in Westmead Sydney (Purchased in 1980's) $200,000 worth of shares and $150,000 cash. Most of the super was contributed by employer or salary sacrificed or was income of the fund however over the years Michael has contributed $200,000 of shares which he inherited from his father as non-concessional contribution to his SMSF.

At the time of commencement of pension, Michael had $1,000,000 which was divided as follows 80% of superannuation interest was taxable component and 20% (fathers shares) as tax free component.

Ten years later on 30th June 2016, thanks to the property market boom, the block of units in Westmead is valued at $3,800,000 and the only other asset of the fund is $200,000 cash. Total assets are $4,000,000 and since taxable component of the pension was 80% at the time of commencement of pension, this translates to $3,200,000 taxable component and the remainder $800,000 is tax free component.

His net rental income from the block of units is $120,000 which is tax free to his Self Managed Super Fund.

If Michael dies today, Jane and Peter will pay 15% tax plus 2% Medicare levy  on the taxable component of $3,200,000 on death benefit payments which translates to Tax and Medicare Levy of $544,000 as they will be treated as his non dependents for tax purposes.

Michael approaches you, as an advisor, to save this tax. The best advice he has received to date, is from his friend Brad, the owner of the Pizza shop. His advice is to marry his three times divorced sister Lisa, so that after his death, super is paid to her tax free, Lisa will then sell the property in the SMSF, withdraw the money tax free and give it to his kids. Michael is not sure if Lisa will wait for his death to get her hands on the property as she may be entiteled to his super before his death under family law and doubts that after his death will pass any death benefit lump sums to his two kids. 

Pre 2016 Budget Strategy

One of the very common strategies implemented by advisors before the budget was to withdraw a higher pension and re-contribute maximum back as non-concessional contribution.

Maximum non-concessional which can be contributed is $180,000 each year, this re contribution is generally to commence another 100% tax free component pension within the fund as the source of contribution is 100% tax free component. This is possible only if the member is working for 40 hours in a 30 day consecutive period, if over the age of the member is 65 years and is less than 75 years old.

These yearly non-concessional contributions are made to super and some of the constraints are:

• member stops work or
• turns 75 years of age or
• there is enough cash to withdraw and re contribute in the fund - if there is not enough cash - then multiple withdrawals and contributions are done on the same day or
• taxable component is full converted to non-taxable component by yearly non-concessional contributions.

To Learn how to commence an account based pension from a Self Managed Super Fund, click here

Since Michael is only 67 years old and if he continues to work 4 hours for three days in a week, for the next 8 years it is possible that to convert $180,000 each year to tax free component by re-contribution strategy.

In our example Michael must withdraw all the $200,000 cash plus all the rental income of the fund $120,000, total $320,000 to make this strategy work. Since he is over 60 years old any pension withdrawal is not included in his income and there is no maximum withdrawal limit for an account based pension as per SIS Regulations 1.06 (9A).

This strategy gets complicated due to proportionate rules and the fund ends with multiple 100% tax free pensions which are annually merged (aka re-boot of pension) to form one large 100% tax free pension and kept separate from the initial mixed taxable and tax free pension.

The fund details will be as follows :

Fund Balance $4,000,000

Taxable Component 80% or $3,200,000

Tax Free Component 20% or $800,000

Income of the fund $120,000

Taxable component of income $96,000

Tax Free Component of Income $24,000

Total pension payment $320,000

80% of pension is taxable component or $256,000

20% of pension is tax free component or $64,000

The balance of the fund after pension payment will be  $3,752,000 ($4,000,00 plus income of $120,000 less pension payment of $320,000) of which $3,040,000 will be taxable component and $712,000 will be tax free component.

But when $180,000 is added to the fund as non-concessional tax free component as a second pension the funds tax free component will increase to $892,000 which is higher than the initial $800,000 of tax free component.

As per SIS Regulations 1.06 (9A), you cannot add to an existing income stream, hence when non-concessional contribution is deposited back in the fund, it creates an accumulation account for the member which may be converted to a pension (on the same day of deposit) and since it is a 100% tax free component (non-concessional contribution) any income of this income stream will also be 100% tax free component.

Some advisors may even suggest to leave this amount in accumulation mode and not convert it into a pension because if converted to pension, a minimum amount would need to be withdrawn. Please note by leaving this non-concessional amount in accumulation account will mean that any income credited to this account will be taxable component even if the accumulation account has only tax free component (non-concessional contribution) which is 100% tax free component because income credited to an accumulaiton account is alwasys taxable component. Further if the fund has an accumulation account and if the fund does not have segregated assets, it will also require an actuarial certificate from an actuary to determine what percentage of income may be taxable to the fund.

To learn more about actuarial certificates click here 

Limitation of this strategy post 2016 Budget

Due to new rules of life time limit of $500,000 non-concessional contribution Michael's death benefit will be subject to more tax at his kids hands at the time of paying his death benefit as he can convert only another $300,000 to tax free component as $200,000 has already been contributed as non-concessional previously.

Caution: The writer is not aware if this strategy will attract any penalties due to Part IVA of income tax act - a scheme to reduce or avoid income tax.

For strategies on how to reduce this tax liability - book for our Part 2 & 3 of our free webinar series by clicking here.

15th September 2016: The Federal Government has decided to drop its $500,000 superannuation cap measure.

To ensure the passage of the Government's broader superannuation package through the Parliament, Treasurer Scott Morrison confirmed the changes to the cap measure today.

The Treasurer said the $500,000 lifetime non-concessional cap will be replaced by a new measure to reduce the existing annual non-concessional contributions cap from $180,000 per year to $100,000 per year;

He said individuals aged under 65 will continue to be able to "bring forward" three years' worth of non-concessional contributions in recognition of the fact that such contributions are often made in lump sums; and that individuals with a superannuation balance of more than $1.6 million will no longer be eligible to make non-concessional (after tax) contributions from 1 July 2017.

-------------------------------------------------------------------------------------------------------------------------------------------

Let us show you...

How to reduce SMSF Audit time to Half

           We know that auditing an SMSF is not easy

Onlinesmsfaudit.com.au presents to you a cutting edge cloud based SMSF audit software technology which streamlines your business and you work smarter & improve your results.

The software is very easy to learn - either via workshops at our office in Sydney or via our Webinars or via our training online videos - all details like when our next webinar, workshop etc. are being held is on the website. We can even come to your office to show you.

Join us for Online SMSF Audit workshop: 4 CPD hours in SMSF Audit

You are invited to Online SMSF Audit workshop to become a certified Online SMSF Auditor.

Learn how our audit software can benefit you and your clients. Attached is a pamphlet with all the features the online auditing tool has to offer.

The classroom training environment gives you the opportunity to step away from the distractions of the office and meet our experienced trainer.

We promise to make it a fun and interactive session Plus you earn 4 CPD hours in SMSF Audit - attached is approval letter.

Where?

In our office training room: Level 4, 263 Clareance Street Sydney NSW

When?

Between 11 am and 3 PM - Lunch Provided

29^th September 2016

How Much?

$165 - includes lunch Plus 4 CPD Hours Plus 10 SMSF Audits worth $165

Click here to book

Click here to learn how to audit an SMSF in half the time 

Disclaimer