Transferring death benefits and the tax implications

Transferring a super benefit from one fund to another requires the rollover of the required amount from a member’s accumulation or pension account to the new fund. Generally, if a pension is fully rolled over between funds, it is required to come to a stop with the amount being added to the member’s accumulation account prior to the rollover taking place. However, the rules operate in a slightly different way when rolling over death benefits.

It is not uncommon for a surviving spouse who becomes entitled to a death benefit lump sum or pension to roll it over to another superannuation fund. The spouse may wish to consolidate their super benefits into one fund, or they may decide not to continue with an SMSF and transfer their benefit to a larger publicly offered fund.

The relatively new death benefit transfer rules have been in place since 1 July 2017 and allow greater flexibility to move benefits between funds compared to the previous rules. The earlier rules restricted the transfer of death benefits to very limited circumstances to a surviving spouse who was in receipt of a reversionary pension and only after a ‘death benefit period’ had expired. Even after the ‘death benefit period’ had passed, the amount was credited to the member’s accumulation account and any link to the previous death benefit pension were lost. This could result in adverse tax consequences.

Since 1 July 2017, it is now possible to roll over death benefit entitlements to other funds without having to wait for the expiration of the ‘death benefit period’. Once the amount has been rolled over it continues to be recognised as a superannuation death benefit and must be used to commence an income stream from the recipient fund or immediately be cashed out as a lump sum. This allows a beneficiary, such as a surviving spouse, to rollover a death benefit pension to a fund of their choice, including an SMSF. The rollover retains the concessional tax treatment associated with a superannuation income stream death benefit. That is, any taxable death benefit pension qualifies for a tax offset equal to 15% of its taxable component.

Taxation of Death benefit pensions

If the deceased or recipient of a death benefit pension is aged 60 years old and over, the recipient, such as a surviving spouse, will receive the pension tax-free. If the deceased and the death benefit pension recipient were both under the age of 60 years, the components are taxed:

• Tax-free component of pension – 0% tax.
• Taxable component of pension – taxed at personal tax rates plus applicable levies, such as Medicare less a 15% tax offset.

The 15% tax offset applies only while the pension is classified as a death benefit pension.

The ability to rollover super benefits, including death benefits, allows a person greater choice and flexibility in fund selection and can allow consolidation of benefits into one fund. This can also help reduce the fees charged and increase the income potential on a person’s benefits.

By Graeme Colley

Executive Manager, SMSF Technical and Private Wealth – SuperConceptsSydney, Australia

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Source : AMP Capital November 2020

Reproduced with the permission of the AMP Capital. This article was originally published at https://www.ampcapital.com/au/en/insights-hub/articles/2020/november/transferring-death-benefit-and-the-tax-implications

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