Tax Relief for SMSF Income Streams

Financial Adviser's picture
Tax Relief for SMSF Income Streams – Important Announcement
In its 2012-13 Mid Year Economic and Fiscal Outlook, the government has announced it will legislate to allow a tax exemption to continue for the period of time after the death of a pensioner. This important announcement suggest that parts of last year's TR 2011/D3 that indicated a pension would cease following the death of a member, would appear to have become redundant.
More information about this legislative change read below.

The Government has announced tax relief for superannuation funds, following the death of a pension recipient, which explains the ATO’s delay in producing a final version of its draft Taxation Ruling TR 2011/D3. We look at how the announcement may impact super funds and the beneficiaries of deceased pensioners, as well as what may have been overlooked in the excitement with which the Government announcement was received.

When the ATO released its draft Taxation Ruling TR 2011/D3 – Income tax: when a superannuation income stream commences and ceases in July 2011, many in the superannuation industry were disappointed with the conclusions reached by the ATO.
In particular, the ruling that a superannuation income stream ceases as soon as the member in receipt of the superannuation income stream dies, unless the pension automatically reverts to a dependent, resulted in many submissions to the ATO.
It was well documented following the release of TR 2011/D3 that the major impact the ruling would have was the taxation of income and capital gains on assets supporting the pension, following the death of a pension recipient, even if a new pension was subsequently commenced. The only relief from that immediate taxation, according to the ATO in its draft ruling, was the certainty provided by a valid automatic pension reversion nomination.
A scheduled date for the release of a finalised version of TR 2011/D3 was deferred a number of times, and the reason for the delays became clearer in October, 2012.
Despite much speculation leading up to the October 2012 Government ‘2012-13 Mid-Year Economic and Fiscal Outlook’, more commonly referred to as ‘mini-budget’, the suggested ‘horror stories’ did not eventuate.
Instead, and much more pleasingly, the Government announced it would legislate to allow a tax exemption to continue for a period of time after the death of the pensioner. Therefore, according to many commentators, the parts of the draft ruling TR 2011/D3 which suggested the pension would cease following the death of the recipient, appear to have become redundant.
But have they? An extract of the Government announcement from the Mid-Year Economic and Fiscal Outlook is reproduced below:

Superannuation - tax certainty for deceased estates

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 superannuation 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 superannuation fund trustees to dispose of pension assets on a tax-free basis to fund the payment of death benefits.
At the present time, details of the proposed legislation are not available. What is known is the fact that some tax relief will be available, but the extent of the relief is unknown.
Some of the questions which will be answered over time include:
  1. What is the position regarding the taxation of benefits in the period 1 July 2007 to 30 June 2012?
    The ATO draft ruling suggested that it would be effective from 1 July 1997, despite being released in July 2011. A positive outcome would be for a final ruling to issue, with effect from 1 July 2012.
  2. Why the references to ‘deceased estates’ in the heading and the body of the text above?
    We know that superannuation benefits often do not pass to the estate of a deceased member and, in fact, may be retained within the superannuation environment to provide an income stream to one or more dependents. Will there be some sort of limitation designed to have benefits pass through the estate, or are we reading too much into the words? Time will tell.
  3. The text also refers to ‘fund the payment of death benefits’. Do the exemptions also cover the situation where the pension ceases and a new pension is subsequently commenced at the discretion of the trustee?
    Presumably that situation would also be provided for in the pending legislation. However, reference to both ‘deceased estates’ and ‘fund the payment of death benefits’ does raise the question whether the use of the words was inadvertent or deliberate. The devil, as they say, ‘will be in the detail’.
  4. What about the other issues raised by the ATO in the draft ruling?
    Whilst the taxation aspect certainly received a large amount of attention, the ruling also covered many other issues, including:
    • the decision that a breach of the pension standards could result in the loss of the tax exemptions, in respect of that pension, for a full year;
    • the fact, regardless of the tax situation, that pensions were considered to cease on the death of the recipient, unless an automatic pension reversion nomination was in place;
    • the effect, if that ‘cessation’ still applies, on proportioning of benefits - will the various pensions, with differing tax components, be mingled together with the deceased member’s accumulation funds, on the basis that:
      • the pension has ceased; and, therefore
      • a member may only have 1 non-pension superannuation interest (within a SMSF)?
In conclusion, the positive news is very welcome, and we will be eagerly awaiting release of both the proposed legislation and a finalised ruling to ensure they cover all we have been hoping for. In the meantime, we suggest that automatic pension reversion nominations continue to be of significant importance.