Superannuation and the Certainties in Life
As the saying goes there are only two certainties in life: death and taxes, however, until recently a third existed – taxes after death. Yes, that’s correct, taxes after death in so far as superannuation funds in pension mode would be subject to tax on earnings post death of the member prior to the benefits being paid out.
There have been changes recently though that have sought to redress the balance arising from Government announcements and an ATO Ruling.
So what’s changed? Formerly, the ATO had expressed the view that where a person dies and they are receiving a pension from their superfund, the pension ceases. This meant that the earnings in the superfund between the date of death and payment of benefits out of the fund were subject to tax.
Now however, where the pension does not automatically revert to another beneficiary on death and certain other criteria are satisfied, the earnings on the assets backing the deceased’s pension account (including capital gains) continue to be tax exempt right up until the time of the benefit payment. The benefit is required to be paid as soon as practicable after death.
This is best demonstrated by an example:
John started an account-based pension in his super fund with $1,000,000 using $200,000 from non-concessional contributions, the balance being from accumulated employer contributions and investment earnings.
His Tax Free Component (TFC) and Taxable Component (TC) percentages for pension payments were fixed at 80 per cent TFC and 20 per cent TC when the pension started. At the date of death the pension account balance was $780,000, accumulating a further $20,000 by the time the benefit had been paid.
The benefit was paid as a lump sum to a family member who was financially independent. Prior to paying the benefit, the fund trustee had disposed of the assets backing the account to make the payment in cash. Those assets included some assets on which a CGT liability existed of approximately $30,000.
As a result of the new regulations and Tax ruling the super fund is exempt from tax on post-death investment earnings. This includes exemption from tax on both:
The new regulations also provide for the family member’s tax liability on the $800,000 benefit, including the $20,000 post-death income, to be worked out on the basis of the original fixed percentages. This means the whole benefit comprises 80 per cent TFC and 20 per cent TC.
It also means the post-death income comprises $16,000 (80 per cent) TFC and $4,000 (20 per cent) TC. If not for the new regulations, all of the $20,000 post-death income would have been TC.
Should you have any questions on the changes highlighted above and how they impact your SMSF or in relation to superannuation generally please contact contact your relevant ESV engagement partner on 2983 1666.
Article by David Prichard