Tax exemption on pension accounts after the death of a member | Accurium

Tax Exempt

When a member passes away the balance of their account cannot be left in the SMSF indefinitely. Their balance will need to be paid out, with the available payout options differing based on the details of the interest and beneficiary.

Non-reversionary income streams

For an income stream which is non-reversionary, Tax Ruling 2013/5 confirms that the pension will cease on the date of death. As the income stream has ceased due to the member passing away there is no requirement for any pension payment to be made before the member’s death and the fund will still be eligible to claim a tax exemption on this interest up to the date of death.

From the date of death there is now a requirement for the deceased member’s interest to be paid out. For non-reversionary pensions, the interest either needs to be cashed as a death benefit income stream to an eligible beneficiary or paid out of superannuation as a lump sum. If a death benefit income stream is commenced, the minimum pension standards do need to be met on this new income stream. The required minimum pension payments for the remainder of the financial year are calculated as they normally would, based on the commencement amount, age of the member and pro-rated accordingly.

In addition to retaining the tax exemption on earnings from the start of the income year to the date of death, Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 confirmed that from 1 July 2012 onward a fund may still be able to claim a tax exemption on an interest which was supporting a non-reversionary income stream from the date of death until the date the balance is paid out. In order to be able to claim this tax exemption, the death benefits must be paid out as soon as practicable.
There is no specific definition of what is as soon as practicable, but the ATO has indicated that the payment being made within 6 months of death would generally satisfy this. However, paying out an interest could be delayed for several reasons, i.e. legal challenges, difficulties liquidating assets, and as such the 6-month time frame is just a guide and can change depending on the fund circumstances. 

Reversionary income streams

If the member who passed away held an income stream which was reversionary then on the date of death the income stream will automatically be transferred to the beneficiary. The reversionary income stream will retain the tax exemption for the deceased member before they passed away and for the beneficiary after it reverts to them.

The minimum pension payments which were calculated at the start of the income year do still need to be made on the reversionary income stream during the financial year of death. The payments can be made by the original pensioner before passing away, by the beneficiary after receiving the income stream or through a combination of both.

If the minimum pension standards are not met, the income stream would cease on 1 July of that year (or on the commencement date if during the year) and would not contribute to the fund’s tax exemption. 

Accumulation interests

For an interest which was in accumulation phase before the member passed away it is treated similarly to a non-reversionary income stream, it can either be used to commence a death benefit income stream for an eligible beneficiary or paid out of superannuation as a lump sum. The only difference is that as the balance was in accumulation phase before the member passed away there is no tax exemption available on the earnings on assets supporting the interest before it is paid out.

Note that it is not possible to retain a death benefit amount as an accumulation balance within the superannuation system. This includes both paying directly to a beneficiary in superannuation as an accumulation amount or the beneficiary partially or fully commuting an automatically reversionary or death benefit income stream. If a death benefit amount does end up in accumulation phase for any reason, i.e. minimum pension standards not met on a death benefit income stream, this balance must be used to start a new income stream or paid out of superannuation as a lump sum.

Case study

Leonard and Lucy are married and members of their own SMSF. Both have an account-based income stream and an accumulation interest in the fund as at 1 July 2019. On 5 December 2019 Leonard passed away.

The nominated beneficiary for Leonard’s account-based income stream was Lucy, and the pension was not automatically reversionary. As the income stream was non-reversionary, it ceased on the date of death, but will still contribute to the fund’s tax exemption up to this date. There was no requirement for a pension payment to have been made before Leonard passed away.

Lucy opts to use the proceeds of Leonard’s account-based pension to commence a death benefit income stream on 26 March 2020, retaining the balance in superannuation. As the death benefit was paid within a reasonable time frame the interest will retain its tax exemption from the date of death until being paid to Lucy.

With the commencement of the death benefit income stream Lucy will be required to make a minimum pension payment on this interest during the income year. The minimum payment amount will be calculated using the commencement amount and percentage factor based on her age, and then pro-rated due to it being commenced during the year. The new pension will also be eligible for the 50% reductions in pension minimums from the COVID-19 relief measures.

Conclusion

The ability to continue claiming exempt current pension income from when a member with an income stream passes away until death benefits are paid is a welcome concession. It will help trustees with their financial planning, and provide some assurance that they do have time with which to deal with these circumstances without suffering from adverse tax consequences.  If you have any concerns regarding meeting the requirement for death benefits to be paid as soon as practicable we recommend discussing with the ATO and your auditor.
 


Disclaimer

This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, legal advice or tax advice, and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. The information is provided in good faith and derived from sources believed to be accurate and current at the date of publication. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. We recommend that you seek appropriate professional advice before making any financial decisions.