New legislation to correct penalties for death benefit rollovers
Legislative amendments due to be passed early in the new year will see the removal of unintended tax penalties for SMSF members who may be rolling over the proceeds of a death benefit to an APRA-regulated fund following the death of a spouse, according to Smarter SMSF.
In a recent webinar, Smarter SMSF chief executive Aaron Dunn said the amendments, contained in Treasury Laws Amendment 2019 (Measures No 3), which was introduced to Parliament on 5 December, would remove an anomaly around death benefit rollovers that had been unfairly penalising members since the introduction of the 2017 super reforms.
“The reforms introduced this concept that we could have portability in respect to super death benefits in so far that it formed part of the rollover super benefits definition,” Mr Dunn said.
“What that allowed us to do was provide greater flexibility for tax dependent beneficiaries to roll over those amounts to a fund of choice, which is relevant for many older SMSF clients where the dominant trustee passes away and the survivor wants to wind up the fund and roll the income stream across to a public offer fund.
“However, the impact was such that where a lump sum death benefit that was rolled over comprised of an untaxed element – so we had insurance proceeds that are being paid into the fund and the fund had claimed a deduction for that insurance over a period of time – this is ordinarily included within the assessable income of the fund.
“Therefore we end up with a taxing point of 15 per cent once that benefit hits the new fund, and because we’ve had that 15 per cent deducted it means the individual only has 85 per cent of that benefit left to commence an income stream out of the fund, which in essence is penalising the tax dependent for wanting to exit one super fund and enter another one.”
Mr Dunn said the new bill would address this issue by making a distinction between an amount rolled over as a result of a death benefit versus a regular member benefit, ensuring all death benefit amounts were exempt from tax.
“The reason why we have that distinguishing feature is because we know that where a death benefit is paid to a tax dependent it is paid to them tax free,” he said.
“Regardless of whether we have a taxed or untaxed element, the amount is paid out to the tax dependent as non-assessable income.”
Mr Dunn added that once passed, the laws would be retrospective and apply from 1 July 2017, which would “in essence make sure that [the law] always operated as it was intended to from day one”.
