Annie Dawson, senior SMSF technical specialist for Heffron, has said that preparing the accounts of an SMSF after a pensioner’s death when their pension didn’t continue can present several challenges as the superannuation and tax rules don’t always align.
“For superannuation purposes, an account-based pension that doesn’t automatically continue to another person stops when the original pensioner dies,” she said.
“At this point, the trustee is no longer required to make pension payments, so it’s important to check that any direct debits are cancelled. Additionally, in the financial year of the pensioner’s death, there is no requirement for the member to have received any pension payments, either before passing or after.”
Due to this, Dawson said it would seem the logical step when preparing the fund’s accounts would be to “turn off” the pension account at the date of death and roll the remaining balance back into the deceased member’s accumulation account.
However, she said this is not correct, and the pension account should remain intact for two reasons.
“From a tax perspective, the pension remains a separate superannuation interest. This means it should not be combined with the deceased member’s accumulation or other pension accounts.”
“A pension that consists predominantly of a tax-free component will continue to have this proportion after the death of the pensioner. Keeping the pension account intact also ensures the fund’s tax liability will not be overstated.”
She said the reason for this is that the former pension account will continue to attract exempt current pension income (ECPI) on earnings attributable to it until the death benefit is cashed.
“The only exception is if insurance proceeds are allocated to the former pension account balance – this money won’t attract ECPI.”
Furthermore, Dawson said this tax treatment continues until the death benefits are fully cashed.
“However, remember, the superannuation law requires trustees to cash death benefits as soon as practicable.”
