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Death, Taxes and Superannuation Pensions in Australia

Announcement posted by Accru Chartered Accountants 17 Feb 2012

The volatility in the share market over the last year has many self-funded retirees revisiting their retirement strategies. As well as investment returns and growth, thought needs to be given to any unintended taxation consequences.
The volatility in the share market over the past eight months has many self-funded retirees revisiting their investment and retirement strategies. While past performance, acceptable future returns and capital growth are the major focus, thought also needs to be given to unintended taxation consequences should a superannuation member die or fail to meet minimum withdrawal requirements. After all, there is nothing certain in life except death and taxes, and superannuation is closely entwined.

We’ve long been aware of the taxation benefits associated with superannuation. Earnings and capital gains made when a member is receiving a superannuation income stream are generally tax free. But what happens when that income stream ceases; either through the failure to meet the minimum pension withdrawal requirements or the death of the member?

In July 2011, the ATO released draft ruling TR 2011/D3 to add some clarity to this sometimes misunderstood area.

Superannuation income streams and minimum withdrawal requirements

Once a person has retired and/or met a condition of release, they are eligible to commence a superannuation pension income stream which could receive concessional tax treatment. To be eligible for the concessional tax treatment, the superannuation pension income stream must pay a minimum percentage annual income to the member.

As the table below shows, the minimum payments are based on the current age of the member and increase over time.

Age 2011/12 2012/13

Under 65 3.00% 4.00%

65-74 3.75% 5.00%

75-79 4.50% 6.00%

80-84 5.25% 7.00%

85-89 6.75% 9.00%

90-94 8.25% 11.00%

95+ 10.50% 14.00%

Following the GFC, the Federal Government actually reduced these minimum withdrawal requirements to allow depleted superannuation balances an opportunity to recover. These reduced rates are being phased out and it is proposed that in 2012/13 they will return to the 2008/09 levels.

From a taxation perspective, failure to meet the minimum requirement, i.e. not paying out the prescribed percentage to the member in any year, will result in the pension being deemed to have ceased on 1 July of that current financial year. Subsequently any earnings or capital gains within the fund will be taxed at 15% and 10% respectively.

Cessation of pensions on the death of a member

On the death of a member, the balance of their super income stream must be cashed out of the fund. This usually means liquidating assets to meet the payment of the member’s balance.

A lot of people don't realise that when you die your super income stream (pension mode) will automatically return to accumulation mode where earnings and capital gains are again taxed! If the assets have to be liquidated, to pay a benefit, any capital gains accrued during the life of the pension, but not realised, will be assessable!

An option is to create a revisionary pension. A revisionary pension means when you die, your pension monies hold their status as a pension and can be paid to a tax dependant (usually your spouse), which means the earnings in the fund continue to be tax free. It should be noted that your trust deed also needs to allow for pensions to be revisionary.

Payment of benefits from a fund following the death of a member

Once a member turns 60 years of age, most categories of superannuation benefits withdrawn from a fund will be tax free. However, some benefits remaining in superannuation after the member’s death will be assessable when paid to non dependant beneficiaries, such as adult children.

If you have not been proactive in reducing the taxable component of your members balance, your non tax dependants (typically children over 18 or 25 if they are at home and studying), will have the privilege of paying between 15% and 30% tax on this component. This is after any capital gains realised after death have also been taxed within the fund. A simple re contribution strategy could remove the majority of any tax payable on the taxable portion of your funds.

Death and taxes may indeed be life’s only certainties, but it’s a matter of how you manage and plan for them. The right superannuation strategy can make a big difference to the tax and financial outcomes.

Accru is ideally positioned to help you navigate these decisions. Please contact your local Accru Business advisor for assistance with this or any other SMSF area.

Article By - Sarah Stribley, Manager Accru Harris Orchard, Adelaide and
Phillip Mills, Wealth Partner, Accru Wealth Strategies, Adelaide

Phillip Mills CFP dip FP, Accru Wealth Strategies Wealth Partner, is a Corporate Authorised Representative of Financial Foundations Australia Pty Ltd AFSL No. 237439

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