The government will not be pursuing a change to the death benefit period as it originally intended, which may require some strategic planning to ensure SMSF clients don’t land with an unwanted tax bill.
Under current law, if an SMSF member receives a death benefit, it can be taken in the form of an income stream – a death benefit pension which is most commonly received by a spouse or a dependent for taxation purposes.
If a spouse, for example, wants to commute their death benefit outside of death benefit period – sometimes called the six-month rule it will be taxed as an ordinary superannuation benefit, which typically attracts higher rates of tax. If they commute it during that six-month period, it is tax free, because it’s treated as a death benefit.
By way of background, in the superannuation reforms, the government initially proposed the death benefit period was going to be removed from 1 July this year, meaning the death benefit pension, whenever it’s commuted, will be taxed as a death benefit.
The government advised key stakeholders in March that they will bring forward the removal of that six-month period, to assist SMSF members comply with the $1.6 million transfer balance cap.
It now appears the government has decided not to bring forward the removal of death benefit period. It’s now going to be removed from 1 July 2017, and not before that, as previously stated.
“All things considered, that’s an appropriate decision,” SuperConcepts’ general manager – technical services and education, Peter Burgess, told SMSF Adviser.
“Some superannuation funds would find it difficult to identify which pensions are death benefit pensions, and find it difficult to identify those pensions before 1 July,” Mr Burgess said.
Bringing forward the removal of the death benefit period also created a technical glitch with the ATO’s practical compliance guidelines on death benefit pensions, causing uncertainty as to whether or not it could roll back the death benefit pension into the accumulation phase before 1 July.
“The downside to this [is] it means individuals who are receiving one of these death benefit pensions, who are under 60 and who exceed the $1.6 million cap in pension phase, may have wanted to cash out that excess out of the fund by bringing forward removal of this death benefit period they would receive that benefit tax free,” Mr Burgess said.
“However, because they’re now not removing the death benefit period until 1 July, if they cash out that excess, they may have to pay some tax.
“This would only affect a small number of individuals. And in any event, if they were concerned about having to pay tax on that benefit, an alternative would be to wait until after 1 July and cash out the excess then, because it’ll be tax free.
“If they’re over $1.6 million [on 1 July], they would be over their cap, so they would end up paying in excess of their cap, but they’ll only be in excess for a very short period of time – possibly by one day.”
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