The regulations were released on Thursday afternoon, just two weeks ahead of the 1 July implementation and amid the controversy surrounding the Government’s capital gains tax and negative gearing Senate inquiry.
Peter Burgess, CEO of the SMSF Association, told SMSF Adviser that unfortunately concerns raised about the open-ended attribution of Division 296 earning post death appear to have “fallen on deaf ears” again.
“This was a late policy change and, as we outlined in our submission on the draft regulations, is likely to give rise to significant administrative costs, complexity and unintended consequences,” Burgess said.
In its submission in April, the SMSFA recommended that the Government “consider amendments to ensure equitable Division 296 outcomes, such that substantially identical superannuation interests at death are subject to consistent tax treatment, regardless of the form and timing of death benefit arrangements.”
“This issue should be considered in conjunction with the broader concerns outlined above in relation to post-death attribution of earnings. Taken together, these issues reinforce the need for serious consideration to be given to an approach under which Division 296 earnings are limited to the period up to the member’s death,” the SMSFA submission said.
Burgess said at the time that applying tax to earnings after death is a significant outcome that wasn’t clearly evident from the legislation or explanatory materials and raises important questions about how Division 296 will operate in practice, particularly where the payment of death benefits can span multiple years due to matters outside of a trustee’s control.
Daniel Butler, director of DBA Lawyers, told SMSF Adviser this part of the regulations introduces significant administrative complexity, especially where estates take years to finalise.
“Prior to the regulations being released, the legislation provided that the total super balance value at the time of death and therefore at end of the financial year of death would be nil and this position gave rise to the thinking that it was the case, if you paid out the death benefit in the year of death, you would be taxed on your total superannuation earnings under Div 296 in respect of that year if your opening balance was over the $3 million threshold,” Butler said.
Tim Miller, head of technical and education for Smarter SMSF, said the final regulations introduce a new defined term — death benefit income stream — that did not exist in the exposure draft.
“It covers income streams (both superannuation and non-superannuation) that are payable to a person because of another person’s death and are supported by the relevant superannuation interest,” he said.
“For SMSFs, this term now feeds into both the withdrawals total formula (section 296-70.03) and the attribution formula. Any SMSF paying a reversionary pension, or one where a member has died and a death benefit income stream has commenced, will need to apply this definition when calculating the deceased member’s relevant superannuation earnings for the year of death and in subsequent years.”
Miller said there are two other major changes of which SMSFs need to be aware.
“The biggest change for SMSFs sits inside section 296-65.03, which sets out how a small fund (six members or fewer, including SMSFs) must attribute its Division 296 fund earnings to each member’s interest,” he said.
“The formula itself is straightforward: a member’s share of earnings equals their average interest value divided by the total value held in the fund, multiplied by the fund’s Division 296 earnings for the year. The problem in the exposure draft was the denominator – the ‘total value held in the fund’ component.”
He continued that this is important for SMSFs because defined benefit and prescribed interests already use a completely separate earnings formula under section 296-70 and don’t participate in the attribution formula at all.
“Including their TSB values in the draft denominator would have silently suppressed earnings attributed to standard accumulation interests, producing an incorrect result,” he said.
“For most two-member SMSFs holding only accumulation interests, the formula works the same way as in the draft. But for any SMSF that holds a pension reserve alongside accumulation accounts – for example, a fund paying a complying lifetime pension – the corrected formula now properly captures all fund assets in the denominator.”
The other major change is under section 296-65.03, and relates to small fund attribution amount that must ordinarily be supported by an actuary’s certificate.
“The exposure draft contained an exception but it only applied if a single individual was the sole member for the entire fund year,” Miller said.
“The final regulations broaden this considerably. The exception now applies if one individual is the only member for all or part of the fund year, no other individual is a member at any time during that year, and the sole member does not hold a defined benefit or other prescribed interest.”
