Leenane Templeton – Newcastle Business Accountants, Business Advisors & Financial Planners

Tag: death benefits

  • Binding Death Nominations Are An Important Part Of Your Estate Planning

    Binding Death Nominations Are An Important Part Of Your Estate Planning

    You must make a binding death benefit nomination to maintain control and certainty over who will inherit your superannuation assets after you pass away.

    Contrary to what you may think, your will does not automatically control the payment of your death benefits. If you do not make a binding death benefit nomination, your super trustee will decide who your super passes onto.

    Familiarise yourself with the death benefit nomination rules, so your super assets are paid on your terms after you are gone.

    Binding And Non-Binding Death Benefit Nominations
    You can make a binding or non-binding death benefit nomination depending on your super fund. A binding death benefit nomination provides the greatest certainty as the legal document binds the trustee to pay your death benefits to the beneficiaries you have nominated.

    Some super funds do not offer binding nominations, so individuals make non-binding nominations instead. Non-binding nominations act as a guide to your trustee that they will take into consideration but are not obliged to follow. Your trustee may pay your death benefit to an individual you did not nominate if they feel they are more appropriate.

    Lapsing And Non-Lapsing Nominations
    Understanding your fund’s options for lapsing and non-lapsing nominations will help you keep your nominations up-to-date and binding. Lapsing nominations typically expire after three years and must be renewed. If your binding nomination lapses without renewal, it will be considered a non-binding nomination upon your death. Non-lapsing nominations are permanent unless you change them.

    Changing Death Benefit Nominations
    Life circumstances like divorce, marriage or the death of a nominated individual may trigger you to change your nominations.

    You can amend, cancel or replace your death benefit nomination at any time, provided the nomination is validly concluded. Remember that a power of attorney can renew lapsed binding nominations if you are mentally incapacitated or unable to sign.

    Eligible Beneficiaries
    You cannot pay your superannuation death benefits to just anyone, as there are strict eligibility requirements. You may only nominate your dependents or personal legal representative.

    Dependents are strictly defined by law. According to the legislation, dependents include
    • Your spouse, whom you are legally married to, in a registered relationship with or live with on a genuine domestic basis
    • Your child (including adopted and foster children) or your spouse’s child
    • Anyone in an interdependent relationship with you at the date of your death
    • Other persons who the trustee deems were financially dependent on you at the date of your death
    You can also have your superannuation death benefit paid directly into your estate.

    Validity Requirements
    Whether you are making a new binding death benefit nomination, replacing an old one or cancelling altogether, you must meet these requirements to make your nomination valid:
    • Nominate eligible beneficiaries
    • Clearly allocate your benefits amongst your beneficiaries
    • Allocate 100 per cent of your death benefits
    • Sign and date your nomination in the presence of two witnesses who are legally adults and not nominated to receive your death benefits
    Ensure your witnesses sign and date the notice in your presence.

    Disclaimer:

    The information contained in this publication is for general information purposes only, professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

  • Tax treatment of death benefits paid from SMSF to the estate

    Tax treatment of death benefits paid from SMSF to the estate

    Demystifying the tax treatment of death benefits paid from an SMSF to the estate

    The tax treatment of death benefits paid from an SMSF to a deceased member’s estate can be complex. Tax law contains a ‘look through’ provision in respect of death benefits paid to an estate (ie, to a legal personal representative being the executor of a will or the administrator in the case of intestacy).

    This article examines the key criteria of this ‘look through’ provision and the resulting tax treatment.

    ‘Look through’ provision for death benefits paid to the estate
    The relevant provisions that deal with death benefits paid to an estate are contained in div 302 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’). Relevantly, s 302 10 provides:

    (2)  To the extent that 1 or more beneficiaries of the estate who were *death benefits dependants of the deceased have benefited, or may be expected to benefit, from the *superannuation death benefit:
    (a)  the benefit is treated as if it had been paid to you as a person who was a death benefits dependant of the deceased; and
    (b)  the benefit is taken to be income to which no beneficiary is presently entitled.

    (3)  To the extent that 1 or more beneficiaries of the estate who were not *death benefits dependants of the deceased have benefited, or may be expected to benefit, from the *superannuation death benefit:
    (a)  the benefit is treated as if it had been paid to you as a person who was not a death benefits dependant of the deceased; and
    (b)  the benefit is taken to be income to which no beneficiary is presently entitled.

    Section 302 10 focuses on two questions, namely:
    • Are the beneficiaries death benefits dependants?
    • To what extent have the relevant beneficiaries ‘benefited, or may be expected to benefit’ from the superannuation death benefit?

    Death benefits dependant 
    The definition of a death benefits dependant is found in s 302-195 of the ITAA 1997. Broadly, a death benefits dependant, of a person who has died, is:

    the deceased person’s spouse or former spouse; or
    the deceased person’s child, aged less than 18; or
    any other person with whom the deceased person was in an interdependency relationship with just before he or she died; or
    any other person who was a dependant of the deceased person just before he or she died.

    If the beneficiary is a death benefits dependant, s 302-10(2) will need to be considered. If the beneficiary is not a death benefits dependant, s 302-10(3) will need to be considered.

    Benefited, or may be expected to benefit
    The tax treatment of death benefits paid to the estate does not simply turn on the number of beneficiaries of the estate who are death benefit dependants versus the number of beneficiaries who are not death benefit dependants. Rather, the tax treatment of any death benefits proceeds that are paid to the estate depends on the extent to which death benefit dependants have benefited or may be expected to benefit from the proceeds. This will need to be calculated. In some circumstances, particularly where multiple beneficiaries and testamentary trusts are involved, the calculation process will be complex and may require actuarial input.

    Tax treatment
    Once the calculation is performed, any proceeds paid to the estate from which death benefits dependants have benefited or may be expected to benefit:
    • are treated as if they had been paid to a death benefits dependant of the deceased; and
    • are not included in the assessable income of the estate (ITAA 1997 s 302-60).

    For any death benefits paid to the estate where death benefits dependants do not benefit or may not be expected to benefit, the tax treatment of such proceeds depends on the nature of the lump sum amount that was paid to the deceased’s estate. Accordingly, the tax treatment of the super proceeds will be as follows (based on the nature of the lump sum):
    Any tax free component of the amount is not included in the assessable income of the deceased’s estate (ITAA 1997 s 302 140).
    Any taxable component (element taxed in the SMSF) of the amount is included in the assessable income of the deceased’s estate, but the estate is entitled to a tax offset to ensure that the rate of income tax does not exceed 15% (ITAA 1997 s 302 145(2)).
    Any taxable component (element untaxed in the SMSF) of the amount would be included in the assessable income of the deceased’s estate and the estate would be entitled to a tax offset to ensure that the rate of income tax does not exceed 30% (ITAA 1997 s 302 145(3)).

    An element untaxed in the fund is rare in an SMSF context and typically only arises if deductions were ever claimed in respect of policy premiums for a life insurance policy held in the SMSF.

    For completeness, it should be borne in mind that any death benefits paid to an estate do not attract the Medicare levy.

    The following example demonstrates the application of the ‘look through’ provision and the resulting tax treatment.

    EXAMPLE
    Alfred was 66 years old when he died. He was a member of Alfred Superannuation Fund. Alfred did not complete a (binding or non-binding) death benefit nomination in respect of his entitlements in the Alfred Superannuation Fund prior to his death. Accordingly, the trustee of the Alfred Superannuation Fund exercises its discretion and pays Alfred’s death benefits to Alfred’s estate pursuant to the governing rules of the fund. The sum of $100,000 that is paid to the estate comprises 50% tax free component and 50% taxable component (element taxed in the Fund).

    The beneficiaries named in Alfred’s last will are: his wife Diana, his two sons Bruce (17 years old) and Clarke (15 years old), and his best friend Robin (50 years old and not a dependant for tax purposes).

    The will provides that Alfred’s superannuation death benefits proceeds are to be divided as follows: Diana ($90,000) and Robin ($10,000).

    Applying the ‘look through’ provision, Diana, Bruce and Clarke would meet the definition of death benefits dependant under s 302-195 of the ITAA 1997. However, of these death benefits dependants, only Diana may be expected to benefit from the superannuation death benefits proceeds. Accordingly, the $90,000 to be paid to Diana would not be included in the assessable income of the estate.

    The $10,000 to be paid to Robin will comprise $5,000 tax free component and $5,000 taxable component (element taxed in the Fund).

    The $5,000 tax free component is not included in the assessable income of the deceased’s estate. The $5,000 taxable component (element taxed in the Fund) is included in the assessable income of the deceased’s estate, but the estate is entitled to a tax offset to ensure that the rate of income tax does not exceed 15% pursuant to s 302 145(2) of the ITAA 1997.

    Conclusion
    Where any superannuation proceeds are paid to an estate, the tax payable in respect of the death benefit proceeds will depend on whether the ultimate recipient of the superannuation proceeds is a death benefits dependant. This is a complex area of law and where in doubt, expert advice should be obtained.

    Article provide by permission of DBA Lawyers, written by Joseph Cheung and William Fettes 15 August 2017

    For more information about SMSFs please call our SMSF team on (02) 4926 2300 or email success@leenanetempleton.com.au

    Visit:  https://leenanetempleton.com.au/self-managed-super-fund/