SCOTT FRANCIS - 24 JUNE 2013
Summary: Anti-detriment payments are tax deduction benefits paid out from a super fund when a member dies. They are payable when a death benefit is paid as a lump sum, not as a pension, and can amount of thousands of dollars.
Key take-out: For people in retirement phase operating their own fund, who do not pay tax on their super, bringing in members of the family who are still working may be a useful strategy to maximise the tax deduction from an anti-detriment payment.
Anti-detriment payments are an area of superannuation fund tax law that are complex to understand – but they have a potential value of tens of thousands of dollars, making them an important part of the superannuation landscape.
Here are six things that you should know about anti-detriment payments:
- An anti-detriment payment is a benefit paid from a superannuation fund when a member dies. It can be paid by a self-managed super fund.
- It is funded by a tax deduction from the Tax Office that ‘refunds’ the 15% contributions tax paid on the superannuation contributions of the member who has passed away.
- It is payable when the death benefit is paid as a lump sum, not as a pension.
- It can be worth tens of thousands of dollars. For example, a person who has paid the 15% contributions tax on $700,000 of contributions may have paid around $100,000 of contributions tax, which is a significant amount of money to potentially receive as a payment.
- The anti-detriment payment is funded by the ATO, giving the superannuation fund a tax deduction that reduces the super fund tax payable by the amount of the anti-detriment benefit paid. In the case of a $100,000 anti-detriment payment, the tax deduction would be $666,667.
- The anti-detriment payment can be made as a lump sum payment from a complying superannuation fund (which would include a well-managed self-managed super fund) to a spouse or former spouse, a child, or a trustee of the deceased estate.
This deduction (from an anti-detriment payment) can be used to reduce the tax payable by the fund in the year of the payment, or in future years. This is important for a fund like a SMSF, which might take many years to use up the tax deduction from an anti-detriment payment.
The ATO website has more information on anti-detriment payments specific to SMSFs (click here).
Let’s consider the practicalities of making an anti-detriment payment from a SMSF.
Effectively two things have to happen following a member’s death to allow an anti-detriment payment, being:
- A lump sum has to be paid to a ‘qualifying’ person (e.g. a spouse or former spouse).
- The SMSF has to have the assets to make the anti-detriment payment. One way to ensure sufficient ‘liquid’ assets to make an anti-detriment payment on the death of a member could be the use of life insurance policies owned by the fund.
Because the anti-detriment payment is effectively a tax deduction to the superannuation fund, that can be used to offset future super fund tax. Unless the fund is still paying tax, the benefit from the ATO will have no value.
This last point stands in the way of many SMSFs benefitting from anti-detriment payments. If a SMSF has two members, who are both retired, then effectively the fund is unlikely to pay any tax, and therefore it won’t benefit from the tax deductions from the ATO.
The Next Generation – using the tax benefits
A possible way around the problem of a SMSF not expecting to pay tax in the future might be the involvement of the next generation in a SMSF. This younger generation, still in the accumulation mode of their superannuation journey, can benefit from the tax deduction generated by an anti-detriment payment. The tax deduction can be carried forward, so it might offset a number of years of tax.
Check the trust deed
As you start to think more about the possible use of anti-detriment strategies in your own fund, keep in mind that it needs to be allowed by the trust deed. An amendment to the trust deed might be required.
Anti-detriment payments are a complex area – and many fund trustees assume that they are not relevant to their situation.
However, an anti-detriment payment may be worth thousands of dollars and is funded by a tax deduction from the ATO, so it is worth considering how it can be accessed by your SMSF. For people in retirement phase, their SMSF is unlikely to pay tax in the future – unless the next generation in the family is in the ‘accumulation’ phase of superannuation assets and becomes part of the SMSF.
Scott Francis is a personal finance commentator, and previously worked as an independent financial advisor.