The ATO has updated its website to clarify that where a dependent beneficiary rolls over a death benefit to The ATO has updated its website to clarify that where a dependent beneficiary rolls over a death benefit to another superannuation fund, there is no requirement to include an element untaxed on the Death Benefit Rollover Benefit Statement (RBS).
A member’s death is a compulsory cashing event and requires the deceased member’s benefits to be cashed ‘as soon as practicable’ (SIS Reg 6.21(1)1). An acceptable form of cashing is to commence what is commonly referred to as a “death benefit pension” to an eligible beneficiary. A death benefit pension may also be commenced where a deceased member’s pension was setup as reversionary, again, to an eligible beneficiary.
An eligible beneficiary of the deceased member, for the purpose of receiving a death benefit pension includes:
- A financial dependant;
- Under age 18 child;
- Child aged 18 to 24 and was financially dependent upon them;
- Child that has a disability of a kind included under the Disability Services Act 1986.
For a death benefit pension being paid to a child, the death benefit pension must be cashed as a lump sum by the time they turn 25, unless they have a disability as noted above.
SIS Reg 6.21(3) permits a deceased member’s benefit to be rolled over to another fund, as soon as practicable, rather than being cashed from the fund. However, once transferred to another fund, the receiving fund must immediately cash the benefit, either as a lump sum or as a death benefit pension. This provision provides the option of either:
- commencing a death benefit pension in a new superannuation fund; or
- commencing a death benefit pension in the deceased member’s fund and then effecting a transfer of the pension to another fund at a later time.
It is not uncommon for a death benefit pension to be transferred to another superannuation fund, for example, from an SMSF to an APRA regulated superannuation fund. The remaining family member(s) may not wish to continue with the SMSF and the associated responsibilities and obligations.
1 July 2017 technical issue
With the changes made as part of the introduction of the 2017 Super Reforms, a technical issue was identified when effecting the transfer of a deceased member’s benefits to another superannuation fund. The tax rules treated the transfer of the death benefit or the death benefit pension as a payment of a superannuation death benefit lump sum to a non-tax dependent, despite the fact that the death benefit would commonly be cashed in the receiving superannuation fund in favour of a tax dependant, for example the deceased member’s spouse, as a death benefit pension. Consequently, where the paying superannuation fund had previously claimed deductions for insurance premiums, Section 307-290 of ITAA2 required the paying superannuation fund to calculate an ‘element untaxed’ and this amount would be included on the relevant Death Benefit Rollover Statement (NAT 74924). [Note: an element untaxed would generally only apply where the deceased member was under age 65].
Where a superannuation fund received the rollover of a death benefit that included an ‘element untaxed’, Section 295-190(1) would include the amount of the ‘element untaxed’ as assessable income of the receiving superannuation fund. Not a great outcome for simply transferring benefits from one complying superannuation fund to another.
Treasury Laws Amendment (2019 Measures No. 3) Act 2020 amended the law retrospectively with effect from 1 July 2017 to ensure any element untaxed determined in accordance with Section 307-290 of the ITAA would not be included in the receiving fund’s assessable income. However, the amendment did not remove the requirement to calculate the element untaxed in these circumstances, or so it appeared. This potentially could give rise to further future issues where a benefit was subsequently paid, and the element untaxed had been recorded in the superannuation fund’s administration system.
ATO clarification when completing Death Benefit RBS
The ATO has updated its website to clarify that where a dependent beneficiary rolls over a death benefit to another superannuation fund, there is no requirement to include an element untaxed on the Death Benefit Rollover Benefit Statement (RBS). Any such amount can be included in the element taxed of the taxable component.
The ATO provides the following case study:
Anthony is 57 and a death benefit beneficiary. Anthony’s spouse was 64 when they died, Anthony chooses to rollover the death benefit from their SMSF (a fully taxed fund) to an APRA regulated fund and start a pension in the APRA regulated fund.
The death benefit is $200,000 and has a tax-free component of $10,000. As the SMSF had claimed deductions for death and disability insurance; applying Section 307-290 of the ITAA, an untaxed element arises of $1,000.
When completing the death benefit rollover form:
- At Label 11 the trustee will enter code Q
- At Label 16 the trustee will report:
- a tax-free component of $10,000 and
- a taxable component – element taxed in the fund of $190,000.
Requirement to calculate element taxed continues
The above mentioned amendments and ATO clarification ensures that there is no element untaxed where a death benefit is rolled over from one superannuation fund to another. However, where the receiving fund claims a deduction for insurance premiums in respect of insurance offered to the dependent beneficiary as part of their new interest, the superannuation fund will be required to apply Section 307-290 of the ITAA to any subsequent death benefit lump sums paid from that interest.
For example, taking the ATO’s case study with the following scenario:
- Anthony died three years later at age 60;
- His superannuation benefit included insurance proceeds from a policy held by the fund on his life and the fund had claimed deductions for the insurance premiums;
- A superannuation death benefit lump sum was paid to his two surviving children who were both over age 18 and not considered tax dependants.
Section 307-290 of the ITAA would apply and result in there being an element untaxed as part of the superannuation death benefit lump sums paid to his adult children. An element untaxed is taxed at the rate of 30% as compared to 15% for an element taxed (Medicare Llevy can also apply).
The ATO’s comments on this issue can be found here.