Peter Johnson, director of Adviser’s Digest, says when looking at a retirement income stream and assets supporting pension liabilities, those assets continue to be assets supporting pension liabilities until a death benefit commences to be paid.
“In theory, when you die, from a tax point of view, you are still in pension phase until you pay out the benefit. However, you must pay a benefit as soon as practicable,” he said.
“If it is genuinely delayed for whatever purpose, such as you genuinely can’t pay it, you’ll be fine. You are still in pension phase.”
However, Johnson said there is an issue if you are paying in specie.
He gave an example of a payment of $500,000 in property from the fund to a member, who is an adult child beneficiary, and is not a death benefit dependant.
“When the fund distributes a $500,000 property to the member, it’s got to withhold $75,000. It can’t ‘in-species’ the whole property unless it’s still got $75,000. You can if you have extra funds such as in shares, but you would have to sell some of those,” he said.
“If you’re distributing a $500,000 property, that’s 0.85, you have to gross it up by 15 over 85 and that is the death benefit and withhold. If you send it to the estate, then the estate pays the tax.”
Johnson continued that if the fund directly pays the member the $500,000, it will incur 15 per cent plus Medicare, which is the taxable income with a rebate.
“However, doing that, the member’s health fund rebate is gone, [if they have] childcare rebate it is gone and Division 293 tax is gone, so it is best to get it to the estate where you can. Don’t pay it to the member,” he said.
“Financial planners may say pay it to the individual to keep it out of the estate, but the amount of extra tax you pay by paying it directly to the individuals rarely makes it worthwhile because of the percentage of estates that get challenged.”
Although the fund doesn’t pay tax on the death benefits and has to withhold if it’s a death benefit going to an individual, the estate does have to disclose the death benefit that is made under Employment Termination Payments at item 13 of the state tax return as a super death benefit.
