Which strategy is better can only be determined in hindsight and will depend on the tax status of the beneficiary who receives the death benefit. As a general rule:
• If death benefits will be paid to a spouse or child who qualifies as a tax dependant, the anti-detriment strategy may be more effective.
• If the death benefit is paid to adult (non-dependent) children the anti-detriment strategy is often more effective, but it will depend on the individual circumstances.
The issues with the conflict between cashout/recontribution and anti-detriment can be mitigated if the auditor method is used to calculate the anti-detriment payment as this option looks at actual tax paid rather than tax components at the date of death.
Rules of thumb
Anti-detriment can increase death benefits but the implementation may be difficult, especially for an SMSF. Some general rules of thumb to note:
• Consider public offer funds that allow anti-detriment payments;
• Keep good records in an SMSF and use the auditor method (with recontribution if possible);
• Consider trade-offs with recontribution and the formula method;
• The future of anti-detriment has the potential to be uncertain;
• Consider how an anti-detriment payment could be funded in an SMSF (for example, reserves or insurance payments) and start putting these strategies into place.
Louise Biti is a director of Strategy Steps – www.strategysteps.com.au
