Alarm at tax office ruling on super pensions overstated
10 August 2011
The Australian Taxation Office (ATO) has recently issued a draft ruling that has implications for Capital Gains Tax (CGT) paid by super funds on the death of a person receiving a pension from the fund.
The draft ruling states that when a member of a super fund dies, the pension ceases immediately and the super fund reverts back from pension to accumulation phase and capital gains tax is payable (usually at the rate of 10%).
Boyce Financial Services (BFS) Superannuation Strategist, Elizabeth Timmins says that the media commentary on this draft ruling has been somewhat over-blown.
“The ATO has floated this idea since tax-free pensions began on 1 July 2007 and has now issued a draft ruling – some parts of which we have anticipated and mitigated through planning, other parts will require further attention,” Elizabeth explains.
“The end result of this draft ruling though, is not half as dramatic as the media commentary would suggest.”
For example, a member has $500,000 in their super fund when they turn on the pension at age 60. By the time they reach 75, the super fund assets have remained the same but grown in value to $1 million; then the member dies.
The ATO says that at the date of death, the pension switches back to accumulation. If the member held the same assets throughout the pension period then there may be CGT of $50,000 (assuming a 10% CGT rate on the asset base of $500,000) payable by the beneficiaries of the fund.
The ATO argues that it hasn’t changed the rules; the draft ruling interprets the current law. However superannuation industry bodies believe that because the pension itself was tax-free, the fund should then pass tax-free to beneficiaries.
Elizabeth notes that strategies are already in place for Boyce and BFS SMSF clients to help mitigate the consequences of this ruling. These strategies include:
1. Ensuring there is not a large unrealised capital gain build up in funds wherever possible.
2. Continuing a pension as a reversionary pension to a spouse, where possible.
3. Ensuring SMSF trustees are aware of the quantum of tax which would be payable if they died, so they can assess each year if it is an issue for them or not.
If you would like more information about this draft ruling and its consequences for your SMSF, please contact Elizabeth Timmins at BFS on 02 6452 3344 or by email on mailto:email@example.com
Elizabeth Timmins and Boyce Financial Services Pty Limited are Authorised Representatives of Lonsdale Financial Group Limited, ABN 76 006 637 225, AFS Licence No. 246934.
The information outlined is based on our understanding of the current superannuation laws. It is current as at 11 August 2011. You should seek professional advice prior to making a financial decision.