Louise Biti explores the issues with anti-detriment payments, including why they are paid, when they can be paid and whether they are a good idea.
Legislation allows the trustee of a super fund, including a self-managed superannuation fund (SMSF), to increase a death benefit payable to certain beneficiaries by making an “anti-detriment” payment.
The origins of this rule emerge from the introduction of contributions tax. At the time, the Government stated that contributions tax was not an increase in tax but rather was a mechanism to bring forward the tax collection point, and tax reductions were applied to benefits (15 per cent offset on pension income and a tax-free concession on lump sums). Anti-detriment provisions were introduced to compensate people who died.
Trustee option
(Section 295-485 of ITAA97)
Essentially when a member of a super fund dies, the trustee has the option to calculate the amount of contributions tax paid by the member over their lifetime and refund it as an increased death benefit. However, the higher death benefit (or anti-detriment payment) can only be paid if the death benefit is paid to an eligible beneficiary.
The trustee claims the extra payment back from the Tax Office (ATO) as a tax refund. This is effected by claiming a tax deduction.
An important catch is that payment of the extra amount cannot be to the detriment of other members. Therefore, the trustee will need to have money in reserves or use consolidated revenue to make the payment. The trustee cannot reduce another member’s account balance (not even temporarily) to make the payment.
Eligible beneficiary
To make an anti-detriment payment the death benefit must be paid as a lump sum to one of the following beneficiaries:
• A current spouse (legal or de-facto, and includes same-sex);
• A former spouse; or
• A child of any age.
If the benefit is paid to the estate, then an anti-detriment payment is only allowed to the extent that the death benefit is reasonably expected to be paid to a spouse and/or child. The super fund trustee may ask the executor for a statutory declaration to confirm the beneficiaries. The executor then becomes liable for any tax issues on the lump sum but also if an excess benefit arises (see below).
Calculating payment
Trustees have an choice of two methods to calculate the amount of the anti-detriment payment:
1. Auditor method – go through fund records to track the actual amount of contributions tax paid. This must be certified by an auditor (ATO IDs 2008/111 and 2008/112).
2. Formula method – if the audit method can’t be used then the amount is calculated using a formula based on the taxable component and service period.
Claiming deduction
The super fund has to pay the increased death benefit as a lump sum and then recoups this amount from the ATO by claiming a tax deduction.
In the example of Mike (see next page), the trustee would claim a tax deduction of $658,827 (that is, $98,824 divided by 15 per cent). This reduces the tax liability to the fund by the $98,824 increased benefit paid. If the tax deduction cannot be fully used in the year that Mike dies, it can be carried forward to offset tax in future years.
Problems can arise
Payment of an anti-detriment amount is optional and does not have to be offered by a trustee. Before making a payment the trustee needs to check:
• Whether anti-detriment is payable under the trust deed;
• That payment will be made to a spouse or child;
• Whether the payment can be funded from current fund resources;
• That the value can be recovered by the fund (that is, the fund needs to have accumulation members to be able to use the tax deduction).
In addition, the trustees and members should consider the impact of anti-detriment on other strategies such as contribution strategies (and impact on contribution caps) and the recontribution strategy.
Excess contributions
The ATO view (expressed in the National Tax Liaison Group meeting in March 2010) is that the anti-detriment amount is added to the member’s account before being paid as a death benefit.
Therefore, if a super fund trustee uses reserves to fund the anti-detriment, this is likely to count against the member’s concessional contribution cap. Payments from reserves count against the concessional contribution cap unless the amount is less than 5 per cent of the member’s account and the distribution is deemed fair and reasonable across all members or all members in a class.
If this cap is exceeded, excess tax will apply. The executor of the estate needs to manage this tax liability and it may delay the ability to finalise the estate.
Public offer funds do not generally have the same issue with application against the concessional contribution cap because annual earnings may be high enough to pay the anti-detriment payment from the earnings without using reserve accounts.
Recontribution strategy
The anti-detriment and cashout /recontribution strategies may work to offset the benefits of each other.
If the formula method is used, then the higher the taxable component in the death benefit, the higher is the potential anti-detriment payment. Therefore, if a member uses a cashout/recontribution strategy to increase the tax-free proportion, this may also reduce the anti-detriment payment.
