In general, the payment of superannuation benefits after a member's death (Death Benefits) are governed by:
Under the new rules, death benefits may still be paid only to superannuation law 'dependants' (SIS Dependants)1.
The new laws have changed:
Some people are referring to the new arrangement as a "death tax". However, (as is explained below) the new arrangement:
If a death benefit is paid as a lump sum to a SIS Dependant:
Who can the pension be paid to? A death benefit paid as a pension may only be paid to a SIS Dependant. If the dependant is a child of the member, then the dependant must be both under 25 and financially dependant (this is a Pension Dependant3);
When must a death benefit pension convert to a lump sum? If a death benefit is paid as a pension to a child, then is must convert to a lump sum as soon as the child either becomes dependant or turns 25.
How is the pension taxed? Remember, the tax free component of the assets used to fund the pension will remain tax-free. The tax payable on the taxable component depends on the member's age when they died, the age of the receiver and on whether tax has been paid on the SMSF's assets used to fund the pension.
For a member who died aged less than 60:
For a member who died aged 60 or more:
The new rules are more generous than the old rules because, for example, under the old rules a lump sum death benefit paid to a Tax Dependant is tax-free only up to the member's pension RBL.
People are referring to the new system as a "death tax" because of the contrasting tax treatment:
The sudden change for the worse in tax treatment after a member dies highlights the need to plan, as far as possible, for clients who are in or nearing retirement - or whose death may be close. Advisers need to be vigilant in:
However, advisers need to be wary of creative strategies to avoid taxes otherwise payable on death benefits. For example, it is inappropriate to set up an arrangement that deems a member's death to have triggered a benefit payment decision to have been made by the member before their death. An arrangement like that would be merely an attempt to avoid tax - and so would give rise to likely penalties etc. under Part IVA.
One appropriate strategy would be to have a member take as much of their super as possible in view of the member's tax position. Members can't withdraw too much from super because, once outside super, earnings on that money is taxed. So the idea would be to take out as much as is possible while still ensuring tax on earnings on the money taken out has a negligible effect on how much total tax the member has to pay.
Advisers should monitor any ATO commentary about death benefits. For an insight into the ATO's current state of mind, you may wish to view the comments of ATO Assistant Commissioner, Stuart Forsyth at Cleardocs' March 2007 Business Insights Breakfast.
For more information in relation to this article, please contact Julian Smith on 02 9288 0555.
For superannuation inquiries generally, please contact Maddocks and ask for a member of the Maddocks Superannuation Team either:
Julian Smith is a partner in the Maddocks Commercial team.
Julian advises extensively in the following areas:
Julian advises clients ranging from public companies servicing the wholesale financial services market to high net worth individuals and their advisers.
Julian has been with Maddocks since undertaking articles in 2001.
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