The government’s plan to apply the Division 296 tax to deceased super fund members in the years following their passing expands the scope of the new impost beyond anything previously outlined and is likely to be unworkable, the SMSF Association has stated.
The industry body made the claims as part of its response to a consultation on the draft regulations that define the operations of the Division 296 tax.
The association noted introducing an open-ended attribution period in regards to deceased superannuants was not covered in discussions with Treasury, the legislation that passed through parliament or guidance on the proposed regulations included with the draft legislation, and this “material expansion of the regime” has not been subject to appropriate scrutiny.
“The proposed approach is difficult to reconcile with the personal tax nature of Division 296. It introduces a level of complexity that is not aligned with established estate administration practices and, in practical terms, may prove unworkable,” it stated in the submission.
“In particular, the draft regulations effectively create an open-ended attribution period, whereby earnings realised in future income years are attributed back to the deceased member’s year of death until such time as death benefits are finalised.
“This creates uncertainty in relation to when a Division 296 liability crystallises, when an assessment will be issued and the point from which penalties and interest may begin to apply.”
The submission added if a Division 296 tax determination was made when a death benefit for an in-scope member was finally paid, this could create a sequencing issue where the tax liability becomes a reality after the superannuation interest has been paid and these events may take place many months or years after the member’s passing.
“In these circumstances, it remains unclear how an executor could elect for any resulting Division 296 tax liability to be paid from the deceased member’s superannuation interest, given that those benefits may already have been distributed in accordance with the SIS (Superannuation Industry (Supervision)) requirements to pay death benefits ‘as soon as practicable’,” it said.
“If this option is not available, an executor’s ability to discharge the Division 296 liability may be materially constrained, particularly where estate assets have already been distributed. This creates a clear misalignment between the timing of the liability and access to the assets from which it arises.”
It also pointed out executors have limited control over the timing of death benefit payments and requiring them to delay the finalisation of a deceased estate until superannuation death benefits are finalised could increase the costs and risks associated with that task, while exposing them to further tax and penalties due to delays outside their control.
