Superannuation death benefits

Introduction

Contributions to a complying superannuation fund may come from various sources and are not normally regarded as ordinary income of the fund under the income tax law. They are essentially receipts of capital. However, Division 295 of the Income Tax Assessment Act 1997 specifically provides that certain contributions made to a fund, such as employer contributions and deductible member contributions, are "assessable contributions". These contributions are included in the assessable income of the fund and subject to the contributions tax of 15%.

Generally, expenditure of a complying superannuation fund will be deductible to the fund to the extent that it is incurred in gaining or producing the assessable income of the fund and is not of a capital nature.

Potential Detriment Payments

Under Division 295, where a superannuation fund makes a death benefit payment, it may increase the payment to the amount that would have been available if taxable contributions had not been included in the assessable income of the fund and contributions tax paid. The increased payment is called a "potential detriment payment". The fund can then claim a tax deduction for the potential detriment payment it makes. The deduction is available so that the death benefit is not reduced as a result of the contributions tax.

The principles that apply to potential detriment payments are as follows:

  1. The payments are not compulsory. Some superannuation funds may make potential detriment payments, but others will be unable to do so.
  2. The potential detriment benefit is only payable in respect of lump sum death benefits paid in favour of a dependant of the deceased member, which obviously includes a spouse, children under 18 years, financial dependants and other persons with whom the deceased member had an "inter dependency relationship".
  3. Payment can be made direct to the beneficiaries or through the deceased member's estate.
  4. The potential detriment payment cannot exceed the actual contributions tax levied against the deceased member's account.
  5. For an accumulation fund, a trustee may choose to calculate the potential detriment payment by either:

    5.1 having the fund's auditor certify the amount that the death benefit has been reduced by the contributions tax; or

    5.2 applying a Taxation Office formula.
  6. Self managed superannuation fund trustees need to work out how to fund the potential detriment payment before they can claim a tax deduction against other taxable income. The payment cannot be sourced from another member's account, and therefore fund reserves need to be established during the life of the fund to enable the potential detriment payment to be made.
  7. The superannuation fund can only claim a tax deduction in the income tax year in which the potential detriment payment is made.
  8. The potential detriment payment will always form part of a lump sum death benefit taxable component.
  9. Re-contribution of a superannuation benefit reduces the size of the taxable component of the death benefit, which in turn reduces the amount of the potential detriment payment.

What should you do?

With the growth in the contributions that have been made into superannuation funds over the last few years, the potential detriment benefit is a significant issue to consider in relation to the payment of death benefits.

It is worthwhile checking with your fund to see whether potential detriment payments can be made. For such payments to be permissible, the fund must allow for them and there must be reserves available to fund them. There must also be the power in the Trust Deed for reserves to be created. If there are no such powers, an amendment to the Deed may be appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.