Death, but no taxes

Dying is a part of life, but at least your tax-free super exemption is safe.

Summary: The Australian Tax Office has confirmed that if a superannuation fund member in pension phase dies before they have received an annual pension payment, (these payments often occur at the end of each financial year), the minimum pension payment standard is not applied.
Key take-out: As long as a member is in pension phase at the time of death, the tax exemption for their super fund account will continue until the benefits are paid out.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

It is not often that the Australian Tax Office can be accused of erring on the side of generosity. But recently, while researching the numerous changes made to the rules and regulations for super funds in pension phase, I experienced the equivalent of St. Paul’s epiphany on the road to Damascus.

In my case it was the discovery that the Tax Office takes a very generous approach to interpreting the minimum pension requirements when a super fund member dies. This attitude of the ATO is even more surprising as a result of guidance notes it recently issued on the subject.

The guidance notes detailed when trustees of a self-managed super fund could self-assess on whether they had met the minimum pension payment standard or not. The importance of super funds meeting all of the required pension regulations has been made all the more important as a result of an amendment to the income tax assessment regulations.

Legislation was recently passed due to the uncertainty that had existed about the tax-free treatment of a super pension account when a member dies. Under the new regulation, when a member dies, and they are receiving a pension immediately before their death and the pension is not a reversionary pension, the tax exempt treatment of the income earned on the pension account will continue for a specified period.

A specified period is defined as being the length of time from the date of death of the member up to, as soon as it is practicable, for the fund to pay out a death benefit lump sum or income stream. This effectively means as long as a member is in pension phase at the time of death, the tax exemption for their super fund account will continue until the benefits are paid out.

For a member’s account to be in pension phase it must pass several tests, one of which is the minimum pension payment test. The guidance notes recently issued by the ATO allow trustees of super funds to self-assess with regard to the minimum pension requirement in certain circumstances.

To be able to self-assess, there must be only a small pension shortfall, and if the failure to take the minimum pension was outside the control of the trustees. The matter also needs to be rectified as soon as possible after the shortfall has been identified by the trustees.

Where these facts apply, trustees must also meet all of the following conditions:

  • the underpayment is only small (that is, it does not exceed one-twelfth of the minimum annual pension payment); and
  • all of the other powers of general administration conditions have been met; and
  • the trustee has not previously been granted the Commissioner’s concession for failing to meet the minimum requirements.

The inclusion of the definition of a small underpayment could lead to the belief that if a member dies before they receive an annual pension payment the fund would not pass the minimum annual pension payment test. This is what I had believed, and I was wrong.

In an example on its website, explaining when a super fund does not meet the minimum pension payment standard, the ATO states that in the event of the death of a member it will not require a minimum pension payment to be made in the year the member dies.

Not being happy to just rely on that statement I contacted the ATO for confirmation of this policy. A spokesperson confirmed that if a member dies before they have received an annual pension payment, which often occurs at the end of each financial year, the minimum pension payment standard is not applied.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

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