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‘Practical issues’ flagged with fix for death benefit rollovers

craig day new smsf
Miranda Brownlee
23 July 2020 — 1 minute read

While the government has now addressed an unintended consequence impacting death benefit rollovers with insurance proceeds, there are still some practical issues with rollovers that practitioners should watch out for, a technical expert warns. 

As part of Treasury Laws Amendment (2019 Measures No. 3) Bill 2019, which received royal assent on 22 June this year, the government implemented a fix for an issue relating to death benefit rollovers with insurance proceeds resulting from previous reform changes.

Colonial First State executive manager Craig Day said the issue relates back to the 1 July 2017 rule changes. 

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“When rolling over a death benefit, technically that is the payment of a superannuation death benefit lump sum, and if there are any insurance proceeds as part of that lump sum, then that triggers that untaxed element calculation,” Mr Day explained in a FirstTech video. 

Normally, when a death benefit is paid out to a spouse, for example, that untaxed element calculation would still be triggered, but it has no impact because the taxation of a death benefit paid to a spouse or other financial dependants is actually zero, he explained. 
“However, when we started to roll over death benefits, the rollover of that lump sum would actually trigger the calculation of untaxed element, and so when it would hit the receiving fund, they would be required to include that untaxed element in the fund’s taxable income and actually tax it at 15 per cent,” he said.
 
“Now the government actually picked this up with the help of industry and said, ‘Well, yes, that’s an unintended consequence’, so they actually have changed the rules there to remove that unintended consequence.”
 
Mr Day said while the issue has now been fixed from a legislative point of view, there are still a couple of practical issues to be aware of. 
 
“These rules are still very new, so as a result of that, you will see situations where super fund systems haven’t been updated, so if they receive an amount of rollover that includes untaxed element, their system may automatically apply tax to that,” he cautioned.
 
“So, if you are looking to rollover death benefits, [you may want to make] a couple of calls to both the sending fund and receiving fund to see whether their systems can handle that or whether they’ve got manual processes to deal with that, before you roll over.”
 
Mr Day said this will help avoid any unintended deductions of tax from happening and having to apply to have those amounts reinstated.
Miranda Brownlee

Miranda Brownlee

 

Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.

Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years. 

Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.

You can email Miranda on: This email address is being protected from spambots. You need JavaScript enabled to view it.

‘Practical issues’ flagged with fix for death benefit rollovers
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