Under the previous anti-detriment rules, trustees of a complying superannuation fund were able to increase a lump-sum death benefit by an additional amount (commonly known as an ‘anti-detriment payment’) when a death benefit was paid directly, or indirectly via the estate, to the spouse, former spouse or child of the deceased. Trustees making an anti-detriment payment were entitled to a corresponding tax deduction.

Under the new rules, this tax deduction is no longer available when the member dies on or after July 1, 2017. Therefore, trustees will not be able to make anti-detriment payments in relation to members who die on or after July 1, 2017.

Understanding the transitional rules

It is important to note that a two-year transition period will apply from July 1, 2017 to June 30, 2019. During this period, trustees are able to pay anti-detriment amounts and claim the corresponding tax deduction when they pay lump-sum superannuation death benefits for members who died prior to July 1, 2017.

From July 1, 2019, no tax deductions can be claimed for anti-detriment payments, irrespective of when the member died.

Impact of anti-detriment payment

The removal of the anti-detriment payment will reduce the amount of lump-sum death benefits payable to eligible beneficiaries.

While there are different ways to calculate the anti-detriment amount, it is often equal to 17.65 per cent of the deceased member’s taxable component.

For example, if a deceased member had a superannuation interest of $100,000 (100 per cent taxable component), the following table summarises the lump-sum death benefits, net of tax:

If paid to deceased’s With anti-detriment

payment

Without anti-detriment payment
Spouse or minor children $117,650 $100,000
Adult children $97,650 $83,000

Note: assuming eligible service date of deceased after July 1, 1988; tax on taxable component is 17% inclusive of Medicare levy.

As illustrated in the example above, beneficiaries who were entitled to the anti-detriment payment would receive a significantly lower amount of death benefit following this change. Therefore, advisers may need to review the client’s estate plans where the net amount of death benefit was intended for a specific purpose, for example extinguishing debt.

It’s also important to note that the removal of the anti-detriment payment means death benefits paid to adult children will be reduced (generally by 17 per cent of the taxable component). Therefore, strategies that reduce the tax payable on lump-sum death benefits, such as the cash out and re-contribution strategy, may need to be considered.

Other strategic impacts

The removal of the anti-detriment payment also has a number of other implications for advisers and clients. These include:

  • It simplifies the decision whether to implement a cash out and re-contribution strategy. Previously, a re-contribution strategy often reduced the amount of anti-detriment payment payable to a spouse, as it reduced the taxable component. Under new rules, as anti-detriment payments are no longer available, the re-contribution strategy does not have this disadvantage.
  • Whether a superannuation fund paid an anti-detriment payment (or not) was previously an important factor when comparing superannuation funds. Following the payment’s removal, advisers may need to review the ongoing appropriateness of a client’s superannuation fund, especially if the previous advice to roll into a super fund was based on the fact that it pays an anti-detriment payment.
  • In rare instances where a self-managed superannuation fund has previously established a reserve for the purpose of paying an anti-detriment payment, trustee(s) may wish to allocate funds out of the reserve (subject to contribution cap constraints).

Craig Day is executive manager of Colonial First State FirstTech.

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