SUPER CHANGES

12 June 2017

SUPERANNUATION DEATH BENEFITS

By Rebecca Lowe

As we have previously advised, from 1 July 2017 a $1.6 million transfer balance cap will be introduced, limiting the amount of superannuation an individual can hold in a tax-free pension account. In addition, it is important to understand that death benefit income streams will also count towards an individual’s transfer balance cap and this will affect the amount of a deceased spouse’s super that a surviving spouse can retain in that environment and the ability to transfer a death benefit pension to another super fund.

Payment of superannuation death benefits:

When a super fund member passes away, a superannuation death benefit is payable to the dependents of the member, or to the member’s estate. The superannuation death benefit can take the form of a lump sum payment or an income stream (also known as a death benefit income stream).

There are restrictions on who can receive your superannuation death benefit. Eligible superannuation beneficiaries are restricted to the following:

• Legal Personal Representative i.e. the executor or administrator of your Estate. Your benefit is paid to your Estate and distributed according to the terms of your Will if you have one, or if you don’t, in accordance with the laws of intestacy;
• A dependant, defined as follows:
  • Current spouse (includes defacto and same-sex);
  • Child (includes adopted, stepchild, ex-nuptial, foster child, and child of your spouse);
  • Any person who is financially dependent on you;
  • Any person with whom you are in an “interdependency” relationship – this is described as a close personal relationship between two people who live together where one or both provides for the financial and domestic support and care of the other.

Note that there are some differences in the definition of a dependant for superannuation purposes (known as a “SIS dependant”), and tax purposes (known as “tax dependant”). Briefly, anybody who receives death benefits directly from your superannuation fund (or via your Estate) and is classed as a tax dependant, will receive the payout tax-free.

Death benefit income streams:

Usually, only a surviving spouse is entitled to receive a death benefit income stream, however there are exceptions for children under 18 or financially dependent children under age 25.

Under current legislation, there is no limit on the value of a death benefit income stream. However from 1 July 2017, the introduction of the $1.6 million transfer balance cap will restrict the amount of a death benefit income stream the beneficiary can retain in superannuation.

Where a beneficiary inherits a death benefit income stream, they do not inherit the deceased member’s transfer balance cap. Therefore where the value of the death benefit income stream causes the beneficiary to exceed their individual transfer balance cap, the excess will need to be cashed out of the superannuation environment. Under the new rules, death benefit income streams will no longer be able to be rolled to accumulation phase or combined with other superannuation monies.

The timing of the credit of the death benefit income stream towards the beneficiary’s transfer balance cap will depend on the beneficiary structure of the income stream, as outlined below.

• Death Benefit Income Streams: reversionary

Where a beneficiary receives a reversionary income stream, the credit to the beneficiary’s transfer balance cap is deferred 12 months from the deceased’s date of death, to give the beneficiary time to arrange their affairs. The amount credited to the transfer balance cap is the value of the reversionary pension as at the deceased’s date of death and does not include any subsequent investment losses or gains in the 12 months between the deceased’s date of death and the credit to the transfer balance cap.

• Death Benefit Income Streams: non-reversionary

This is where a beneficiary receives a death benefit income stream that is not reversionary i.e. the beneficiary is nominated under a binding nomination.

For death benefit income streams commenced before 1 July 2017, the amount of the transfer balance credit is the value of the income stream at 30 June 2017. For death benefit income streams commenced after 1 July 2017, the amount of the transfer balance credit is the commencement value when the income streams begins to be paid to the beneficiary. This amount may include investment earnings accrued between the time the person died and when the death benefit income stream becomes payable.

The assessment of death benefit income streams in respect of the beneficiary’s transfer balance cap is best summarised below:

To circumvent potential transfer balance cap issues in respect of receiving a death benefit pension, members of a couple could consider the following:

• To retain funds in the concessionally taxed superannuation environment, the beneficiary of a death benefit income stream may commute one of their own account based income streams back to accumulation phase to create room in their transfer balance cap. This will minimise the amount which must be paid to the beneficiary as a death benefit lump sum outside of superannuation.
• Implementing a re-contribution strategy to equalise their superannuation member benefits and limit the negative impact of a death benefit pension on their transfer balance cap.

If you have concerns about your estate planning arrangements in light of the legislative changes from 1 July 2017, please contact your adviser.

Rebecca Lowe
Senior Para-Planner
Authorised Representative No. 453075

If you have any questions or comments, please email me at rebecca@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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