SMSF pension fund tax exemption ceases on death

A self managed superannuation fund that is paying an income stream (pension) is exempt from tax including capital gains) on the earnings from assests used to pay the pension.
The ATO has issued a draft ruling TD2001/D3 discussing its views on when a pension commences and ceases.

The draft ruling confirms that the ATO believes that a:

superannuation income stream ceases as soon as the member in receipt of the superannuation income stream dies, unless a dependent beneficiary of the deceased is automatically entitled under the superannuation fund’s deed, or the rules of the superannuation income stream, to receive an income stream on the death of the member.

THe consequences of this is that any fund investment sold at at profit to fund the payment of death benefits to the member’s benficiaries with be taxable capital gains for the fund.

This ruling will not comes as a surprise as many commentators have reached the same interpretation of the law.

One way to avoid or mininise this additional tax sting on death is for the trustees to try to avoid building up large unrealised capital gains. Where the fund invests in listed investments such as shares, the trustees could regularly sell growing shares and repurchase them at the same price. This would realise the capital gain while the fund is still tax exempt.