Regulations have commenced that will continue the tax exemption
on the earnings of a Self-Managed Superannuation Fund
(SMSF) where a pensioner has died.
Previously, under TR 2011/D3, the ATO indicated a pension ceased
on a member's death (and therefore the entitlement to exempt
current pension income ceased) unless it automatically reverted to
another person or particular binding death benefit nominations were
in place (see our previous alert 'ATO view on pensions –
what you must know').
The amended definition introduced by the Income Tax
Amendment (Superannuation Measures) No. 1 Regulation 2013
applies to the 2012/13 income year and later income years to
continue the tax exemption from the death of a person receiving a
non-reversionary pension until it is as soon as practicable to pay
the benefit where:
the death benefit is a lump sum paid after the deceased's
death using only the amount from the relevant superannuation
a new pension is commenced using the amount applied from the
relevant superannuation interest after the deceased's death;
immediately before the deceased's death the superannuation
interest was supporting a pension that was payable to the
This means the earning of the fund on the assets supporting the
former pension can remain exempt from tax.
However, there are some traps. If insurance proceeds or an
anti-detriment amount are added to the pension after the
deceased's death but before the death benefit is paid, the
earnings on those added amounts are not exempt from tax as exempt
current pension income. This means not all the income of the SMSF
will be tax free, which could have a major impact if capital gains
are triggered in realising assets to pay benefits.
For example, if the deceased dies while receiving a pension with
an account balance of $100,000 (which is not reversionary) and, the
fund receives $400,000 in insurance proceeds, giving rise to a
death benefit of $500,000, income on the $100,000 is tax free but
income on the other $400,000 is not tax free.
This means for income earned on the insurance proceeds to be tax
free, the pension must be reversionary (and the trust deed must
allow the proceeds to be credited to the pension account).
Additionally, 'as soon as practicable' is not defined,
so it is important that the death benefit is paid promptly
following the deceased's death (see the explanatory memorandum
for examples of 'as soon as practicable').
Finally, these rules do not apply and are not needed if the
pension is reversionary, as the same pension continues and the
entitlement to exempt pension income continues on the balance
supporting the pension.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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