ATO confirms important view on TBC treatment of insurance proceeds
Following recent discussion with the ATO, SMSFs holding life insurance policies may want to consider automatically reversionary income streams in their estate planning, as the payout will be treated differently under the transfer balance cap, says Accurium.
Accurium actuary and SMSF technical services manager Melanie Dunn said the ATO has recently confirmed with Accurium that there is an important benefit with automatically reversionary income streams, which SMSF professionals should be aware of.
Ms Dunn explained that if a member holds a life insurance policy in their SMSF, then upon their death the SMSF will receive the proceeds of that policy.
“The payout will be treated differently under the TBC depending on whether the member’s income stream was reversionary or not,” she said.
Law Companion Ruling 2017/3 specifies that the commencement value of a death benefit income stream includes any investment earnings accrued to that point, she explained.
“This includes any proceeds from a life insurance policy if it is decided that this will be paid as a death benefit income stream — regardless of whether the policy was held in respect of an accumulation or retirement phase interest of the deceased member,” she said.
This means, she said, that where that where a pensioner passes away with no reversionary income stream, the value of any life insurance payout would be included in the commencement value of a resulting death benefit income stream.
The death benefit recipient, she explained, would have a credit applied against their TBC equal to the balance of the death benefit pension at the date it commenced inclusive of the insurance proceeds.
However, with an automatically reversionary income stream, the TBA credit value is the balance on the 'starting day', she said, meaning the date the pensioner passes away.
“Given that any life insurance proceeds will not be received until after this date, they would not form part of the account balance, and therefore the credit value for TBC purposes,” said Ms Dunn.
“This means that for an automatically reversionary income stream that included a life insurance policy and where proceeds would be paid into this interest after death, the value of the payout would not raise a TBA credit.”
Ms Dunn said a credit equal to the balance of the automatically reversionary income stream at date of death would apply to their TBA 12 months later.
“The life insurance proceeds, not matter how large, would not impact the TBC and could remain in the tax free retirement phase,” she said.