The government will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. This change will have effect from 1 July 2012.
The super law requires the benefits of a deceased member to be paid out of the fund as soon as practicable following the member’s death. The continuation of the earnings tax exemption beyond the death of a member will be subject to this existing requirement.
This change will benefit the beneficiaries of deceased estates by allowing super fund trustees to dispose of pension assets on a tax-free basis to fund the payment of death benefits.
This was an anomaly brought to the superannuation indusry’s attention by the ATO a year ago. It is a sensible amendment that just restores the law to the way most people thought it had always worked.
When a superannuation fund is in pension mode it does not pay tax on income or capital gains derived from those assets used to provide the pension. The ATO earlier this year caused much angst when it determined that upon the death of a member, the fund is no longer providing a pension to that member and there for any capital gains that occur in disposing of assets to pay out death benefits to the pensioner’s beneficiaries are not exempt from tax.
The treasurer today announced that from 1 July 2012, the Government will amend the law to allow the tax exemption for earnings on assets supporting superannuation income streams to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. This proposed continuation of the exempt current pension income (ECPI) provisions beyond the death of a member will be subject to the existing requirement for the benefits of a deceased member to be paid out of the fund as soon as practicable following the member’s 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.