Many people are not aware of the deduction that is available upon the death of a member. This is an excellent tax planning opportunity in addition to the tax credit received by an SMSF when an anti-detriment payment is made from the fund.
What deduction is available?
In addition to the ability to claim a deduction for insurance premiums (including notional premiums where self insurance is in place), superannuation funds are able to elect to claim a deduction for future liability to pay benefits in certain circumstances.
What requirements must be met?
The trustee must make an election (under ITAA 1997 section 295-465) to claim the deduction for a future liability to pay benefits instead of claiming a deduction for insurance premiums paid in the financial year in which the member dies. Once the election is made, it applies for all future financial years (unless the Commissioner determines otherwise). As with all things SMSF, the trust deed will need to be reviewed to ensure that there are no contravening provisions that may prevent the fund from taking advantage of this opportunity.
What are the other considerations?
Losses created by the deduction can be carried forward. However, there needs to be an expectation that the fund will be able to use the deductions. For a husband and wife in pension phase, the deduction may provide a valuable buffer in the event that the death of the last spouse results in capital gains tax being applied on the payment of a lump sum benefit. Alternatively, other family members may join the fund to take advantage of the future tax benefit.
What if the fund doesn’t have insurance cover?
In the same way that funds can claim a deduction for self insurance premiums, there is no requirement to hold an insurance policy in order to claim a deduction for future liability to pay benefits.
Mary, aged 56, has an account balance of $300,000 and insurance cover of $400,000. The tax-free component is $150,000, and the fund has claimed a tax deduction for the insurance premiums in previous years. Mary died on 3 August 2010, was born on 24 July 1954 and has an eligible service date of 1 September 1980.
Account balance $300,000
Insurance amount $400,000
Total death benefit $700,000
Service days 10,928
Days to retirement 3,278
Deduction for liability to pay future benefits $161,523
[700,000 * (3,278/10,928+3,278)]
Mary’s fund is then able to claim a deduction for $161,523, providing a future tax benefit of up to $24,228 ($161,523 * 15%). As Mary’s fund has previously claimed deductions for insurance premiums, her benefit will already contain an untaxed element of the taxable component so there will be no difference in the PAYG tax that would apply if her benefit was paid to a non-tax dependant if the deduction for future liability to pay benefits is claimed.
The ability to claim a tax deduction for future liability to pay benefits may provide a valuable benefit for an SMSF, particularly where insurance premiums have previously been claimed or where the death benefit is paid to a tax dependant. The ability of the fund to utilise any future tax benefit must be considered, in conjunction with the additional PAYG tax that will be payable if the benefit is paid to a non-tax dependant.
However as always, this area of superannuation can be very complex and is highly advisable to seek professional financial advice before making any decisions.
General advice warning:
This information is of a general nature only and is not intended to represent investment or professional advice. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.