Superannuation pensions and estate planning: tax-free status to continue even after death

The Government has announced it will pass legislation to extend the tax-free status of income supporting a superannuation pension until a deceased member’s benefit has been paid from the fund. This will be effective from 1 July 2012 and will also apply for self-managed superannuation funds.

As a result, a pension being received by a deceased member will be taken to continue after death for tax purposes. This means a trustee can now dispose of assets after the death of a member who was receiving a pension tax-free (to the extent the assets were supporting that pension) to fund the payment of a death benefit.

This clarifies the uncertainty caused by the position adopted by the Australian Tax Office (ATO) in TR 2011/D3. In that ruling, the ATO provided its view that a pension stops when the pensioner dies, unless either the pension was automatically reversionary or the pensioner had made a binding death benefit nomination that required their death benefit to be paid as a pension.

TR 2011/D3 – when does a pension start and stop?

The ATO’s view in TR 2011/D3 is discussed in our previous article ATO view on pensions – what you must know.

However, the ATO’s view that a pension stops upon a member’s death, except where:

• the pension is reversionary to another beneficiary or
• there is a binding death benefit nomination in place that specifies the benefit must be paid as a pension

is not relevant after 1 July 2012 (assuming the announced change is legislated).

What it means for you

The draft legislation is yet to be released so there is some risk this important change may not be fully implemented. Therefore, until there is more certainty it would be prudent to adopt a cautious approach.

Where there is a risk that a pension ceasing on death will cause considerable tax implications, the member should still consider making:

• the pension reversionary to their surviving spouse or other beneficiary or
• a binding death benefit nomination that specifies both the beneficiary and that the pension must continue to be paid to that person.

For more detailed information please contact Clinton Jackson or Scott Hay-Bartlem on +61 7 3231 2444.