Accumulation-phase death benefit fix possible

accumulation death benefit

An SMSF expert has provided solutions to ensure a death benefit paid during the accumulation phase is not excessively impacted by tax.

SMSF members should not pay a death benefit while their fund is in the accumulation phase, but a technical expert has suggested solutions to avoid unnecessary tax if a fund is facing this situation.

Speaking during a webinar, SuperConcepts SMSF technical support executive manager Nicholas Ali noted the death of a member marks a compulsory cashing event and suggested three options for funds still in accumulation mode.

“The first thing would be to commute the reversionary pension to a lump sum or part lump sum withdrawal from super,” Ali said.

“Continue with the reversionary pension and potentially commute and withdraw [some of the member’s] own pension from the super system, which is probably the best option given that the money remains in the superannuation system.”

Despite being in accumulation phase during the second option, provided the fund has a substantial amount in pension mode, no tax would be paid as exempt current pension income (ECPI) would offset any assessable income.

“The third option is to pick the reversionary pension because it is a death benefit and cannot be commuted and then left in accumulation mode, and transfer back [the member’s] own pension or part of their pension to the accumulation phase,” Ali said.

He further advised trustees that choose to commute their own account-based pension that the event be completed on or before the 12-month credit date which aligns with the member’s passing in order to avoid an excess transfer balance cap.

“Notice any earnings there will reduce what she will be able to have in pension mode because they are considered a credit to one’s transfer balance cap. We want to make sure that we do not breach that and the commutation must occur.”

To that end, the reversionary pension route has allowed super funds to have more than the member’s transfer balance cap in the pension phase and therefore provide the opportunity to maximise ECPI.

“It also gives up the ability to manage any sale of assets. Perhaps there is a lumpy asset in there, including a property that needs to be sold off,” Ali said.

“It gives us the ability to sell that asset and not incur capital gains tax, and potentially engage with our client and the next generation to make sure that we have the right outcome for them.

“If we combine that with the first strategy, the cash-only contribution strategy, then that enhances what we will be able to do with our clients.”

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