Death benefits, SMSF, Strategy, Tax

Consider deduction instead of wind-up

SMSF Death benefit Future services deduction Death Disability Wind-up

Trustees should consider a lesser-known tax deduction as a viable alternative to closing down their SMSF when a member is approaching a death or incapacity event.

SMSFs with a member facing a disability or death event should consider using the future services liability deduction as an alternative to winding up as it offers certain tax advantages on any future contributions made to the fund, according to a senior technical specialist.

Smarter SMSF education and technical manager Tim Miller pointed out the deduction could be claimed by the fund if another member has either died or received a disability benefit prior to age 65.

Miller said the deduction is based on the future portion of the entirety of the lump sum or pension commencement and could be a viable alternative to winding up an SMSF in certain circumstances.

“If we’re seeing members of the fund pass away and we’re able to claim this future liability deduction, then in most instances that is going to create a significant tax loss for the superannuation fund,” he told attendees of a SuperGuardian webinar held last week.

“That tax loss [can be] utilised to offset contributions tax and other things, as well as capital gains along the way, so [it’s] very beneficial.

“[If you have] the death of a member where they’re under 65, and the other member [of the fund] says ‘I don’t want to manage the fund anymore’, if they’ve got access to this future liability deduction inside the SMSF, then by retaining the fund, they may be able to offset the contributions tax for a number of future years, which could be significant.”

As such, he used an example to illustrate how the deduction might work in practice.

“I had a situation about three weeks ago with a client who had a $2 million insurance payment payout. They passed away at age 51, so they’ve got 14 years of future service period,” he said.

“And ultimately of that $2 million, they only had a balance of a couple hundred thousand in their self-managed superannuation fund, but the total benefit payment was going to be $2.2 million.

“The future service deduction based on their service period was going to be a tax deduction of $800,000 if they were eligible to claim it.

“Now that $800,000 for their spouse who was the same age would suggest that spouse will never pay tax on contributions again because they’re not going to make $800,000 worth of capital gains or contributions over the next 15 years.

“And if they do, it’s going to be at the tail end, potentially, where they look at moving into pension phase. So the loss of tax losses is certainly a significant one if you’ve got them inside the super fund.”

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