Super paid after a member’s death is called super death benefits. This article summaries major changes to super death benefits from 1 July 2017. The best reference to the changes is LCG 2017/3: Superannuation reform: Superannuation death benefits and the transfer balance cap.
Super death benefits retain their identity, “death benefit period” irrelevant
The death of a super fund member is a “compulsory cash event”. The death benefits must be “cashed” as a lump sum or as a pension, or a combination of the two.
Before 1 July 2017, the industry practice was that upon the expiration of the “death benefit period”, the spouse of a deceased member can commute a death benefit pension and keep the amount as their own accumulation interest. The original death benefit can be mixed with the recipient’s own superannuation interests and become normal “member benefits”.
The ATO doesn’t agree with this practice.
From 1 July 2017, if a death benefit pension is commuted, regardless before or after the “death benefit period”, the trustee must either pay out the commuted amount as lump sum or start a new death benefit pension. This particular income stream will need to be clearly labelled and tracked. It is not an option anymore to keep it as accumulation in super. In other words, death benefits will retain their identity as death benefits.
The policy intent is to force death benefits out of the super environment, not even in the accumulation environment.
Super death benefits can be rolled over
From 1 July 2017, the definition of a roll-over superannuation benefit is amended to allow a superannuation lump sum death benefit to be rolled over.
Reg 306‑10.01 Roll‑over superannuation benefit
For the purposes of paragraph 306‑10(b) of the Act, each of the following kinds of superannuation benefit is specified:
(a) a superannuation death benefit, unless it is paid to a person covered by subregulation 6.21(2A) of the SIS Regulations or subregulation 4.24(3A) of the RSA Regulations in relation to the deceased member;
Effectively, the definition of roll-over superannuation benefit is extended to allow roll-over when a death benefit beneficiary is entitled to receive a death benefit as a pension.
Reg 6.21(2A) has the following beneficiaries eligible to receive death benefit pension:
- a spouse
- a child under 18 years of age
- a financially dependent child who is under 25
- a child who is disabled irrespective of their age, and
- a person who was in an interdependency relationship with the deceased.
Again, death benefits will retain their identity. The proportioning rule continues to apply to the roll-over death benefit. That is, the death benefit comprised the same tax-free and taxable components it had prior to the rollover. The roll-over amount can’t remain in accumulation phase or be mixed with the dependant beneficiary’s own super interest.
Death benefit pension and transfer balance cap
The death benefit pension received will count towards the recipient’s TBC. If the surviving spouse has an existing transfer balance account and receives a death benefit pension of $1.6m, there will be an excess amount.
Although death benefit pension can’t be kept as accumulation, in order to retain more balance in the super environment, the surviving spouse can choose to commute their own pension into accumulation, and keep the death benefit pension as pension.
TBC treatment of reversionary pension and non-reversionary pension
From 1 July 2017, a reversionary pension creates a TBC credit 12 months after the date of death, however the value counted is at the time of the death. A non-reversionary pension created a TBC credit when the new pension starts, the credit is valued at the new starting date. For a non-reversionary pension, not only the value may include investment earnings, it may also include an amount paid under a life insurance policy.
Currently, when the deceased’s TRIS was in retirement phase, while the recipient hasn’t met a condition of release, the reversionary TRIS can’t be reverted. To receive a TRIS as a death benefit pension, the recipient must meet a condition of release in their own right.
This technical difficulty is created by the following logic:
- TRISs are excluded from being in the retirement phase under s.307-80(3) of ITAA 1997.
- TRISs can enter retirement phase if the person attains age 65; or meets the conditions of release of retirement, terminal medical condition, or permanent incapacity. As the test is on the person receiving the TRIS, the recipient needs to be retested for their own conditions of release.
- 21(2) has been amended to insert after “pensions”, “each of which is a superannuation income stream that is in the retirement phase”. It stops TRIS in accumulation phase to be paid out as pension.
Child recipients of a death benefit pension from a deceased parent have a modified transfer balance cap (cap increment), depending on the deceased parent’s super interests.
Child recipients of a death benefit pension are those
- Under 18 years old
- Between 18 and 25 years old and were financially dependent
- Have a permanent disability
The cap increment for child recipients of a death benefit pension before 1 July 2017 is $1.6m.
From 1 July 2017, if the deceased parent had no transfer balance account at the time of their death, the cap increment is a proportion of their parent’s TBC. If the deceased parent had a transfer balance account, the cap increment is a proportion of the balance of their parent’s pension account.
See Subdivision 294-E Modifications for death benefits dependants who are children