As part of the 2012/13 Mid-Year Economic and Fiscal Outlook (MYEFO), the Government announced that it would amend the law to allow the pension earnings tax exemption to continue following the death of a pension recipient until the deceased member’s benefits have been paid out of the fund.
On 4 June 2013, the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulations 2013 that gives effect to this measure was registered.
Previously
The Commissioner’s view contained in draft ruling TR2001/D3 (now TR 2013/5) is that a pension would cease at the member’s death unless automatically reverting to a tax dependent beneficiary. Before the MYEFO announcement was made, there is great uncertainty on the tax treatment of the pension earnings after the death of a pension recipient.
From 1 July 2012
1. The new measures expand the meaning of superannuation income stream benefit to allow earnings tax exemption in the period from the member’s death until their benefits are cashed by paying out as a lump sum and/or by commencing a new superannuation income stream (subject to the benefits being cashed as soon as practicable).
2. The tax exemption will not apply on any amounts added to the member’s benefit through insurance policy proceeds or via self-insurance. This ensures that the level of the exemption would be no greater than it was before the member’s death.
3. The regulation created an alternative method for calculating the tax free and taxable components of certain superannuation benefits paid after the death of a pension recipient.
Example 1: A member is receiving a pension immediately before his death on 2 April 2013. The pension is non-reversionary and the trustee pays the death benefit as a lump sum (which did not contain andy insurance policy proceeds) on 11 June 2013. For the purposes of the earnings tax exemption, the lump sum amount is taken to be the amount of the superannuation income stream benefit payable from 2 April 2013 until 11 June 2013.
Example 2: In the above example, the trustee decide to pay an anti-detriment amount. The anti-detriment amount is a taxable component of the lump sum payment.
Income Tax Assessment Regulations 1997
regulation 995‑1.01
(2) In these Regulations:
superannuation income stream benefit:
(a) means a payment from an interest that supports a superannuation income stream, other than a payment to which regulation 995‑1.03 applies; and
(b) for the purposes of sections 295‑385, 295‑390, 295‑395, 320‑246 and 320‑247 of the Act—includes an amount taken to be the amount of a superannuation income stream benefit under subregulation (3) or (4).
(3) For the purposes of sections 295‑385, 295‑390, 295‑395, 320‑246 and 320‑247 of the Act, if:
(a) a superannuation death benefit that is a superannuation lump sum is paid after the death of a person (the deceased) using only an amount from a superannuation interest; and
(b) immediately before the deceased’s death, the superannuation interest was supporting a superannuation income stream payable to the deceased; and
(c) the superannuation income stream did not automatically revert to another person on the death of the deceased;
the amount paid as the superannuation lump sum, to the extent it is not attributable to any amount (other than investment earnings) added to the superannuation interest on or after the deceased’s death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased’s death until as soon as it was practicable to pay the superannuation lump sum.
(4) For the purposes of sections 295‑385, 295‑390, 295‑395, 320‑246 and 320‑247 of the Act, if:
(a) immediately before the death of a person (the deceased), a superannuation interest was supporting a superannuation income stream payable to the deceased; and
(b) a new superannuation income stream is commenced using an amount applied from the superannuation interest after the death of the deceased;
the amount so applied, to the extent it is not attributable to any amount (other than investments earnings) added to the superannuation interest on or after the deceased’s death, is taken to be the amount of a payment from a superannuation income stream of a superannuation income stream benefit that was payable from the day of the deceased’s death until as soon as it was practicable to commence the new superannuation income stream.
(5) In this regulation:
investment earnings does not include:
(a) an amount paid under a policy of insurance on the life of the deceased; or
(b) an amount arising from self‑insurance.
