Death benefits, SMSF, Tax

$3m soft cap contains death glitch

$3 million soft cap tax Deceased member Death benefit

A distinct abnormality is contained within the draft legislation pertaining to the $3 million soft cap with regard to deceased super fund members.

An SMSF technical expert has highlighted an anomaly contained in the draft legislation for the implementation of the $3 million soft cap with regard to superannuation fund members who pass away during an income year.

Colonial First State head of technical services Craig Day pointed out only certain superannuants are excluded from the 15 per cent tax associated with the $3 million soft cap when they die.

“A member who died before the last day of the [financial] year [will not be caught by the tax]. So if you’ve got a client who dies [during] the year – great. We now know in that situation before we’ve actually paid a death benefit we don’t have to go and figure out a tax liability that we then levy upon their estate,” Day told attendees of The Tax Institute National Superannuation Conference held in Melbourne last week.

“The interesting thing here though is the wording. So if a client dies on 29 June, they’re out [and the tax doesn’t apply to them] or if the client dies on 1 July, they’re out. But if the client dies on 30 June, sucked in, you’re paying the tax.”

He admitted he originally thought this irregularity was an unintended error and drew Treasury’s attention to it.

“But apparently Treasury actually thinks [a member who dies on 30 June] should be paying the tax. Why I don’t know. But the good news if you die on any of the other 364 days of the year, you don’t have to pay the tax,” he said.

During his presentation, he also pointed to another strange exclusion in the draft bill.

“A child receiving a death benefit as a pension [will not have to pay the tax]. So they’d need to be receiving a death benefit as a pension for more than $3 million,” he revealed.

“[But] since 1 July 2017, we had those complex transfer balance cap rules applied to kids and pensions, I have had precisely zero questions about children and death benefit pensions and I have never seen a child with a death benefit pension, let alone one for $3 million.”

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