ATO death benefit guidance removes unnecessary admin burden

Prior to the government addressing the issue, the rollover of lump sums would, in certain circumstances, incorrectly trigger the calculation of untaxed element and when it hit the receiving fund, the fund would be required to include that untaxed element in the fund’s taxable income and actually tax it at 15 per cent.

The government changed the law to address this unintended consequence, explained Colonial First State executive manager Craig Day.

Following the change, however, there was still some uncertainty around whether this untaxed element needed to be reported by the sending fund, he said.

“The question was, well, what’s the point in the sending fund actually calculating and reporting that untaxed element, because if the receiving fund is just going to ignore it for both tax and tax component purposes, then why should the sending fund actually have to calculate and report that figure?” Mr Day questioned.

“That’s quite a big issue when you’re thinking about administration systems for both large funds and SMSFs because they would need to put systems in place to identify those types of situations, calculate the figure, report it to the receiving fund who would then just ignore it.”

After industry raised the issue with both the ATO and the Treasury, the ATO last week released guidance confirming that the sending fund would not need to report any untaxed element as part of the rollover documentation. The ATO guidance also provides examples.

“This is a very welcome development that avoids unnecessary cost being built into superannuation administration systems,” he said.

Mr Day pointed out that in a lot of cases, the SMSF is the sending fund because there may have been a couple in the SMSF and when one of the spouses passes away, the SMSF then becomes unviable because they have no interest in running the fund.

“In those types of situations where you may see a rollover of a death benefit back to a retail fund for the purposes of paying a death benefit pension,” he said, “it was in those types of situations where you would see that the SMSF or the administration providers would have to identify that and calculate this amount of untaxed element and be able to report that to the receiving fund which would be a large APRA-fund who would then just ignore that figure.”

The ATO guidance, he said, does away with a lot of redundant administration and avoids a redundant administration process and the costs involved in having to implement all of those changes into the systems.

SMSF Association deputy chief executive Peter Burgess agreed that the ATO’s approach is a welcome change for the industry.

“It will avoid the need for the industry to make unnecessary changes to software and reporting procedures which would have been necessary if super funds were required to report an untaxed element when rolling over death benefits to another fund,” he said.

Mr Burgess said it makes sense that the paying fund shouldn’t need to report this untaxed element to the receiving fund.

“In our view, it was simply a ‘leftover’ and now obsolete measure that arose from an unintended consequence with the drafting of the super reform legislation that came into effect from 1 July 2017, and we are pleased that this issue has now been addressed,” he said.