New rules to work out the tax components of a superannuation death benefit from a non-reversionary pension

Self-managed superannuation fund administrators, planners and accountants should be aware that the rules to calculate the components of a superannuation death benefit where a person receiving a non-reversionary pension dies have been amended by the Income Tax Assessment Amendment (Superannuation Measures No 1) Regulation 2013. The new rules are effective from 3 June 2013.

When the new rules must be used

The new rules (‘method statement’) apply to work out the tax-free and taxable components where:

• the deceased member was receiving a non-reversionary pension (income stream);
• no amounts other than investment earnings or an anti-detriment increase (compensation for tax paid on contributions) have been added to the superannuation interest on or after the deceased member’s death; and
• a death benefit is paid as a lump sum from that superannuation interest; or
• a new pension (income stream) is commenced using the amount from that superannuation interest.

Calculating the tax-free and taxable components using the method statement

The effect of the method statement calculation is that the anti-detriment increase or insurance proceeds count toward the taxable component of the death benefit (and could form an untaxed element), whereas before the regulation the components could have reflected the existing taxable and tax-free components of the interest. This means the tax payable in relation to the insurance or anti-detriment increase could be significantly higher than before the amendment.

Where there is life insurance through superannuation and the member is drawing a pension, it may be more tax effective for the pension to be reversionary (where this is possible), as insurance added to a reversionary pension after the death of the member will generally take on the existing components of the pension.

Example (from the explanatory statement)

A member is receiving a pension immediately before his death. The pension is non-reversionary and the trustee pays the death benefit as a lump sum. The below table summarises the impact of the new rules on the tax components pre and post death.

Pre death superannuation interest and components

Post death benefit and components (no amounts added)

Post death benefit and components (with anti-detriment increase of $10,000)

Superannuation interest- $100,000

Tax-free component – $20,000 (20%)

Taxable component – $80,000 (80%)

Death benefit – $75,000

Tax-free component – $15,000 (20%)

Taxable component – $60,000 (80%)

Death benefit – $85,000

Tax-free component – $15,000 (20%)

Taxable component – $70,000 (80%)

Advisers should consider these issues when providing strategic advice to clients.

If you would like any assistance in relation to these issues please contact a member of our superannuation team.