Fix for death benefit rollover trap at a standstill for SMSFs

While the changes were largely welcomed, there is a potential trap in the new rules, which could trigger significant unexpected tax liabilities where the rollover includes any life insurance proceeds, Mr Day warned.

“This problem is that rolling over a death benefit technically involves paying a death benefit superannuation lump sum to the beneficiary under the Tax Act,” Mr Day said.

While this wouldn’t normally cause an issue, he said, if there are any insurance proceeds included in the rollover for which the fund has ever claimed the premiums as a deduction, this could be a “real sting in the tale” for SMSFs.

“In this situation, there is a provision in the Tax Act that requires a fund paying a death benefit lump sum, which now includes a rollover, to calculate an amount of untaxed element to include in the payment which will then be included in the receiving fund’s assessable income and taxed at rates of up to 15 per cent,” he cautioned.

Speaking at the Chartered Accountants Australia and New Zealand National SMSF Conference, Mr Day said this was an unintended consequence of the changes to the rollover rules and the industry has been talking to government to try and get it addressed.

“We had been talking to Kelly O’Dwyer [about the issue] and she understood it, but then we all saw what happened a few weeks ago,” said Mr Day.

Following the leadership spill which saw Scott Morrison become Prime Minister, newly appointed Treasurer Josh Frydenberg announced that he would be responsible for the development of taxation and superannuation policy, while Assistant Treasurer Stuart Robert would look after financial services and the day-to-day management of superannuation.

Former minister for financial services and revenue, Kelly O’Dwyer stepped into the role of Minister for Jobs and Industrial Relations, while staying on as Minister for Women.

At the moment, the issue has been referred to Treasury, said Mr Day.

“Treasury are trying to understand the impact in terms of the number of people and the extent of the impact on those people to figure out whether or not this is a material impact that needs to be addressed, but we’re not going to get anything out of Treasury without ministerial leadership,” he said.

“For the new minister, this is probably item 523 on his priority list, so if you have clients in this situation, be very careful about rolling them over, whether that's from one public offer fund to another public offer fund or out of an SMSF to a public offer fund. Think about that in terms of where you’re holding insurance until we know this issue is resolved.”