STRATEGY
Optimising tax outcomes in death
A legislative amendment made in 2013 has allowed for more effective tax outcomes for death benefit beneficiaries, but there is one critical contingent factor, Nicholas Ali writes.
NICHOLAS ALI is SMSF technical support executive manager at SuperConcepts
28 selfmanagedsuper
While we often (rightly) focus on control of an SMSF when a member dies, it is often not relevant as many funds have relatively straightforward requirements from an estate planning perspective. Perhaps more important real-world issues revolve around strategies to maximise the super benefits paid to beneficiaries. One area in which trustees (and some practitioners) lack knowledge is superannuation interests. Many people think a member has one superannuation interest, which is the case if the member balance is in accumulation mode. What is not fully understood is each pension is considered a separate superannuation interest. As such, each pension can have its own proportion of tax-free and taxable components even within the one SMSF. This can provide some strategic planning opportunities regarding death benefits. But first, let’s wind the clock back a little to see how we have got to this point.
The ATO first raised the issue on 20 August 2004 with the release of Interpretative Decision (ID) 2004/688, which stated “once a fund no longer has any current pensions in payment and there is no provision for a contingent pension to commence, the fund no longer requires current pension assets”. In other words, where there was no reversion in place for a superannuation income stream, any monies used to fund the income stream, then paid out of the fund as a lump sum or cashed within the fund would come under accumulation mode and be taxed accordingly and therefore potentially be subject to capital gains tax (CGT). Any non-reversionary income stream would automatically become an accumulation benefit of the deceased even if it subsequently became a death benefit pension for a spouse. The introduction of Simpler Super on 1 July 2007 created further issues, with earnings on an accumulation account being considered a taxable component. Moreover, it also meant the separate superannuation interest calculated and crystallised at the commencement of the pension ceased and the pension components were then amalgamated with any other accumulation benefits of
