SMSF members with larger balances that are also receiving a death benefit pension may need to look at whether it will push their total super balance (TSB) past $3 million if the proposed Division 296 tax is introduced, a legal specialist has pointed out.
DBA Lawyers director Shaun Backhaus said death benefit pensions may be a factor in the Division 296 calculations used to work out the proportion of earnings to be taxed, which is based in part on the current-year adjusted TSB.
“Those current-year TSB adjustments include the death benefits paid from an income stream if you’re a recipient of that stream because of the death of another person during the year, less the TSB value the day during the year on which you start to be a retirement-phase recipient of an income stream because of the death of another person,” Backhaus said during a recent webinar.
“So, for example, a reversionary pension would continue and any payments coming out get added to your adjusted TSB, but the death benefit value of that pension, let’s say it’s $1.9 million, gets taken out of your adjusted TSB and doesn’t form part of your earnings.”
He said in comparison a pension that ceased on death would continue to be eligible for exempt current pension income and would not have to pay minimums in the year of death.
This has led to the view it would be better to have a pension cease on death and recommence in July, especially where events took place late in the financial year.
“You won’t have the pension payments going to the surviving spouse and they will have the whole next year where those are not included in their adjusted TSB,” Backhaus said, adding this scenario highlighted the need to review how pensions may impact Division 296 assessable TSBs.
“The key point to take with this is next year earnings are the current adjusted TSB for that year minus previous TSB.
“So while the value of that death benefit pension, the 1.9 million, in the year of death is taken out of adjusted TSB and is not earnings you’re taxed on, next year that formula brings in the previous TSB, where it is captured.
“It could push you over the $3 million threshold in the first year and then because it’s in previous TSB, while you don’t get taxed on it as if it’s earnings, it can certainly push people who are below $3 million above that.
“That is one reason people with reversionary pensions might want to think about because if someone dies late in the year, you may suddenly have a TSB over $3 million which pushes you into Division 296 territory.”
