Tim Miller, head of education for Smarter SMSF, said there are several areas advisers need to be cognisant of when dealing with death benefits for clients, one of which is deductibility.
“We need to understand the ramifications of both claiming and not claiming the premiums that we’re paying from an insurance policy point of view. Now that might sound odd because we would naturally say ‘Of course, you’re going to claim it’, but the question always has to be posed, is super the right environment?” Miller said.
“So yes, we have the capacity to claim a tax deduction, but is super the right environment based on who the end beneficiary is? If we’re talking about a death benefit to a spouse, then they’re a tax dependant and there’s no tax to pay.
“If we’re paying it to a non-tax dependent, such as an adult child, then we have our 15 per cent standard tax on death, subject to claiming a premium, subject to dying prior to age 65 and then paying that benefit to a non-tax dependant.”
He continued there is also an untaxed element uplift, which means there is potential for a further 15 per cent – a total of 30 per cent – on a future portion of that payment.
“Having an understanding and appreciation for that is something that’s often overlooked when we talk about how it is great to hold insurance in super because of the deductibility, but it may not be so great from a tax point of view if the end beneficiary is not a tax dependant.”
Aaron Dunn, CEO of Smarter SMSF, said even from a dependant beneficiary point of view, the reality is subject to the quantum of the insurance.
“There’s going to be limitations, potentially around things like the transfer balance cap, maybe even in the context of the proposed Division 296 tax measures as well. Historically, loading up insurance in superannuation never posed an issue because of the beneficiary being a spouse,” Dunn said.
“In this instance, if we use that as the example, we would in essence be able to turn that into an income stream in the fund, and subject to their ages or the age of the deceased member, would literally be taking that as a tax-free benefit payment to them on an ongoing basis.”
However, he continued, with the introduction of the transfer balance cap and the potential additional tax at $3 million, looking at the structuring of insurance is equally as important as it is where there is a non-tax dependant, and adds an additional layer to the overall discussion around where insurance needs to be held.
Miller said the future liability to pay a benefit deduction by foregoing the deduction based on the premium in the year the death benefit payment is made, and claiming the future portion of the benefit if the member passed away before age 65, can provide a large tax deduction that will help the offset future contribution tax liabilities of the fund.
“Again, when you link that to a transfer balance cap, where you can’t put everything into a pension, maybe there are benefits to consider,” he said.
