On 3 May 2016 (2016 Federal Budget), the Coalition government announced that it would abolish the anti-detriment provisions from July 2017, and this change became law on 29 November 2016.
Since 1 July 2017, a super fund cannot pay a refund of a member’s lifetime superannuation contributions tax payments into a deceased estate, and likewise the super fund is not able to claim a tax deduction for this payment (as per Schedule 9 of Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016).
What is an anti-detriment payment?
According to the explanatory memorandum (Chapter 11) accompanying the legislation, the anti-detriment provisions allow an income tax deduction “to a complying superannuation fund, life insurer, or complying approved deposit fund that pays an increased superannuation lump sum because of the death of a member for the benefit of their spouse, former spouse or child, to compensate for income tax paid by the fund in respect of contributions made for the member during their lifetime”.
The amount a super fund can deduct is “broadly:
- the amount by which the benefit is greater than it would otherwise be to compensate for the income tax that was payable on the member’s contributions;
- divided by the income tax rate that applies to assessable contributions to the fund (that is the amount of tax the fund is expected to have borne in relation to the contributions).”
Let’s be clear from the start: ensuring a super fund can pay out the anti-detriment payment is a complex process, but until 30 June 2017, the payment was legal, and consistent with current superannuation and tax rules. The ant-detriment payment rule had been in place since the 1980s, when a tax on super contributions was introduced.
An anti-detriment payment enabled the refund of contributions tax paid during a fund member’s lifetime, which was then paid as a lump sum (after the fund member’s death to certain dependant/s (spouse, former spouse, child including adult child) of the deceased fund member.
Implementing an anti-detriment payment was not rorting the super system. The federal government has chosen to ban this measure, but not because members of large super funds, and also members of SMSFs, were abusing the rules. Such a ban is simply a policy measure to fine-tune the super rules, and rein in the budgetary impact of such payments as the Australian population ages. In the explanatory memorandum (Chapter 11) accompanying the legislation, the government states that the “anti-detriment provisions are inconsistently applied by funds and insurers. While the concession is intended to benefit certain dependants of deceased members, it relies upon the actions of fund and insurers. This is because not all funds and insurers are willing or able to increase benefits payable because of death.
Note: Anti-detriment payments were only payable when a death benefit was paid as a lump sum. Reversionary pensions (if applicable) and death benefit pensions would need to be commuted, to enable an anti-detriment payment to be made. Anti-detriment payments were available from many large super funds, and also from SMSFs (if the trustees set up the systems to allow such payments).
How are death benefits taxed under the super laws?
Death benefits are an important component of the superannuation system, and are expressly referred to when defining the sole purpose of superannuation. Note that adult children are generally not considered dependants under the tax laws, but are dependants under the super laws. What this means is that financially independent adult children can receive super death benefits, but tax is payable on those benefits.
Tax-free superannuation death benefits are payable to spouses, to children under a certain age, to financially dependent individuals and to persons who had an interdependency relationship with the deceased. Adult children can receive super benefits, but tax will be payable on the taxable component of the death benefit. For more information about death benefits, see article links at the end of this article.
Note: An anti-detriment payment was in addition to the usual death benefits payable by a super fund to the beneficiaries of a deceased fund member.
Alert! The introduction of a $1.6 million transfer balance cap (for 2017/2018 year) on transfers to retirement phase accounts also affects Australians receiving superannuation death benefit pensions. For more information, see SuperGuide articles Burden for retirees: Monitoring $1.6 million transfer balance cap and Superannuation death benefits and the $1.6 million transfer balance cap.
What if a person died before July 2017, but death benefits are paid after that date?
The new legislation allows for timing issues in relation to anti-detriment payments.
If a super fund member died before 1 July 2017, then an anti-detriment payment is still possible up to 30 June 2019. From 1 July 2019, no anti-detriment payments are available for fund members who died before July 2017.
If a super fund member dies on or after 1 July 2017, then anti-detriment payments are not available.
Note: The amendments removing this income tax deduction availability to super funds and life insurers for anti-detriment payments, allows 2 years for such a payment to be made, assuming a person dies before July 2017. Note that the government has not allowed such a generous timeframe for the payment of other death benefits, which is generally 6 months (‘as soon as practicable’), and 12 months if the payment of a reversionary pension tips the beneficiary over the $1.6 million general transfer balance cap (for more information on death benefits and the $1.6 million cap, see SuperGuide article Superannuation death benefits and the $1.6 million transfer balance cap).
Why was this anti-detriment rule introduced anyway?
The following explanation of anti-detriment payments is taken from DIY Super For Dummies, 3rd Australian edition (reproduced with permission). Note: Since 1 July 2017, the extract below is for historical reference only, and is not an explanation of the rules applicable from July 2017. Although referring to SMSFs, the main facts are equally applicable to commercially available super funds (such as industry or retail super funds):
Refunds, reserves and contributions tax
In 1988, when the federal government introduced a 15 percent ‘contributions’ tax on before-tax (concessional) contributions, the tax laws were changed to permit a refund of the contributions tax upon the death of a super fund member. This obscure and little-known rule can deliver a refund of all contributions tax paid during a deceased member’s lifetime.
A payment, known as an anti-detriment payment, can be made to [certain dependants] of the deceased, and the super fund can claim a tax deduction for making this payment, provided the SMSF’s trust deed allows for such a payment.
The rationale behind this refund is to ensure that the wife or husband or children of the deceased aren’t detrimentally affected by the imposition of the contributions tax. The rule only applies to lump sums, rather than death benefit pensions, paid to dependants. If a death benefit pension is in place, the dependant is already being compensated for the contributions (earnings) tax via a tax-free income stream, or a 15% pension offset (if deceased and dependant are under 60).
Here’s how it works: The amount paid in contributions tax for the life of the deceased member is paid to that member’s dependants and the SMSF claims that payment as a tax deduction. For the SMSF to claim a tax deduction, the fund needs assessable income, which generally means the SMSF requires other fund members to be in accumulation phase in the current and following financial years.
The trickiest aspect of this scenario is how the SMSF is going to find the cash to pay out the refund to the dependant/s. The ATO doesn’t return cash to the SMSF; rather, the SMSF can use the tax deduction to reduce the SMSF’s tax bill over a period of time.
In most cases, the answer to this cash flow issue is to use a reserve, although some SMSFs use life insurance payouts. Reserves are one of the more complex areas in super and I suggest you head straight to an adviser to assist you, if you’re considering taking advantage of the anti-detriment rules. You may even need to arrange your existing adviser to outsource this particular strategy to a SMSF reserving specialist such as a SMSF lawyer.
Source: Extract from Trish Power’s book, DIY Super for Dummies, 3rdAustralian edition (Wiley). Reproduced with permission.
More information on super death benefits
For more information on superannuation and death benefits see the following SuperGuide articles:
- Superannuation death benefits and the $1.6 million transfer balance cap
- Estate planning: How can a SMSF live forever?
- SMSF pension earnings remain tax-free after death
- Superannuation after-life: Beware the dastardly death tax, and the cap
- Superannuation after-life: Dear Dad, Tax for everything
For information on the other July 2017 super changes, see SuperGuide articles Latest superannuation changes: 2017/2018 guide and Superannuation checklist: What rules apply for the 2017/2018 year?