The potential tax treatment of death benefits rolled over on or after 1 July 2017 where the rollover amount includes life insurance proceeds continues to be a sleeper issue, a technical expert has warned.
“Before 1 July 2017, the definition of a rollover super benefit excluded death benefits. This meant that a beneficiary of a deceased member could not roll over a death benefit to another fund to commence a new death benefit pension,” AIA Australia technical manager Natasha Panagis told selfmanagedsuper.
“However, from 1 July 2017, the government amended the rollover rules to allow certain eligible beneficiaries, such as a deceased member’s spouse, to roll over a death benefit to another fund without losing the death benefit status of the payment.”
Panagis said while this change was largely welcomed by industry, a potential trap with the new rules may trigger unexpected tax liabilities where the rollover includes any life insurance proceeds.
“As a rollover of a death benefit technically constitutes the payment of a super death benefit lump sum to the beneficiary, the sending fund may need to classify part of the rollover amount as an untaxed element if there are any insurance proceeds included in the rollover where the fund has claimed a deduction for the insurance premiums,” she noted.
“As the amount of untaxed element created on the rollover of a death benefit will depend on the size of the rollover, the insurance proceeds and the age of the original member when they died, clients may receive less than expected due to the tax liability on the untaxed component.
“This is clearly an unintended consequence of the changes to the rollover rules and not in keeping with the spirit of the legislation, so industry has been talking to government to try and get it addressed.”
She noted the recent Liberal leadership spill and ministerial changes meant the issue seems to have been put on hold for now.