One of the changes proposed in the Government's 2012-13 Mid
Year Economic and Fiscal Outlook, delivered by Treasurer Wayne Swan
earlier this week, provides some certainty for taxpayers regarding
the taxation treatment of superannuation death benefits.
Here, special counsel Justin Byrne and solicitor Hannah Byrne
explain how the proposed change will affect the payment of
superannuation death benefits.
The Government is proposing to amend the current law to allow
the tax exemption on superannuation pension investment earnings to
continue following the death of a fund member until the
member's benefits have been paid out.
This amendment will remove previous uncertainty as to whether
the tax exemption on superannuation pension investment earnings
ceases as soon as a fund member dies.
The change is intended to have retrospective effect from 1 July
How are investment earnings from pension assets usually
Ordinary and statutory income that a complying superannuation
fund (including a self managed superannuation fund) earns from
assets held to provide for superannuation pensions is exempt from
Whether this exemption ceases as soon as the member dies has
been an area of uncertainty for superannuation funds. If the
exemption ceases, then there is a possibility of double taxation
where a death benefit has to be paid out of a superannuation fund.
In other words, if any investment assets have to be sold to pay out
the death benefit, then capital gains tax of 10 percent will apply,
plus another possible 16.5 percent tax if the benefit is paid to
certain beneficiaries (such as adult children).
The Government's announcement in the Mid Year Economic and
Fiscal Outlook confirms that the law will be amended to allow the
tax exemption for pension earnings to continue following the death
of a pension recipient, until the deceased member's benefits
have been paid out of the fund.
This will mean that superannuation fund trustees can dispose of
pension assets on a tax-free basis to fund the payment of death
benefits, eliminating the obligation on super funds to pay CGT
where super pension assets have to be sold to pay out a benefit. As
a result, tax will then only be payable if the benefit is paid to a
non-dependant, such as an adult child.
Superannuation law requires a deceased member's benefits be
paid out of a superannuation fund as soon as practicable following
the member's death. The proposed continuation of the pension
earnings' tax exemption after the death of a fund member will
be subject to this requirement.
Why this is good news for those who operate
This change will benefit beneficiaries of deceased estates by
allowing the superannuation fund trustees to dispose of pension
assets on a tax-free basis to fund the payment of death benefits.
This could result in some significant tax savings, particularly
where a superannuation fund has held real estate within the fund
for a considerable amount of time.
This proposed change may also encourage superannuation fund
trustees to further invest in real estate and/or other assets.
Previously, superannuation fund trustees may have been reluctant to
invest in real estate due to the potential for significant capital
gains tax liability, particularly where the superannuation fund has
held the real estate for an extended period of time.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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