Anti-detriment payments: How your family can claim back your superannuation taxes
10 Oct 2013
By Darren Higgs
I hate talking about morbid subjects such as death, however, having recently helped a client's family, I want to discuss a little known strategy called 'anti-detriment payments'. This strategy can help your family and increase the value of your estate. In some cases, the difference can be in the tens of thousands of dollars – this will depend though on the circumstances at the time.
In the event of your death, your super benefits pass on to your nominated beneficiary (subject to trustee discretion). Upon your death, some super funds may also pay an additional amount over and above your account balance. This amount is called the 'anti-detriment payment' and is essentially a refund of contributions tax that has been paid by the deceased member.
Who can an anti-detriment payment be paid to?
An anti-detriment payment can only be paid to an eligible beneficiary, such as your estate, spouse, former spouse or a child of the deceased at the time of death / payment. Therefore, it is vital to regularly review your superannuation death benefit nominations. Death benefit payments to your spouse or child under age 18 are tax-free.
Payments made to adult children may incur a death tax, depending on your 'tax-free' and 'taxable' components. Anti-detriment payments are treated as 'taxable components', so the adult children may end up paying death tax (16.5%), which would negate a lot of the benefit. The rulings are even less clear for superannuation income streams, where the anti-detriment payment may be split proportionately across the 'tax-free / taxable components'. However, you should "control the controllable" by making sure the death benefit nomination is right.
Calculating the contributions tax
The trustee can calculate the contributions tax by using the 'auditor method', where they go back through your records, see what contributions tax you have paid and have this signed off by an auditor. This can be very time consuming.
Alternatively, where it is not possible to determine the level of contributions tax via the 'auditor method' the Tax Office allows a formula to be used for this purpose.
The following example shows the difference anti-detriment payments can make to your estate:
Bart was born on 1 July 1960. He had $400,000 (including $100,000 tax-free component) in his super fund at the date of death on 30 September 2013. His eligible start date is 1 July 1980. Based on these assumptions and the formula approved for use by the ATO the anti-detriment payment is $42,935. This $42,935 will be paid in addition to the $400,000 thus increasing the value of your estate to be paid to your beneficiaries.
If the deceased member was in pension phase, as a lot of retirees are, an anti-detriment payment can still be paid as long as the death benefit is paid as a lump sum. It may not always be the best option for your beneficiaries to take a lump sum amount. If this all sounds confusing, it is! It is vital therefore that you seek financial advice from a qualified professional.
Things to consider when making anti-detriment payments
When considering anti-detriment payments make sure you consider the following:
- Not all superannuation funds make anti-detriment payments. Check beforehand.
- Most (not all) large superannuation funds will not automatically apply the payment, or even tell you about it. You need to make a claim, which means you need to be aware that these things exist.
- It is not always practical for a SMSF to make anti-detriment payments, as the capital is not always available or the SMSF has a limited ability to use the tax deduction within a reasonable timeframe. Consider this before launching into a SMSF.
- An anti-detriment payment cannot disadvantage other members. The trustee must have money in reserves or use consolidated revenues. The trustee cannot reduce other member's super balances to make the payment. This is another reason why it is not always practical for a SMSF to make an anti-detriment payment.
- The anti-detriment payment may count towards the deceased member's concessional contributions caps. The ATO has placed some exclusions around this, however it is unlikely that anybody would be able to meet these exclusions.
- A popular strategy used by a lot of retirees, or people approaching retirement, is the re-contribution strategy. This strategy increases the tax-free component of your superannuation benefits. However, it also offsets the anti-detriment payment if you use the formula method. Unfortunately, it is only with hindsight that you know whether the re-contribution strategy or anti-detriment payment was better.
As a general rule (please note that the following is general advice and should definitely not be taken as personal advice):
- If death benefits will be paid to a spouse or child (tax dependent), the anti-detriment strategy may be more effective
- If death benefits are paid to adult (non-dependent) children, the re-contribution strategy is generally more effective, particularly if insurance payments are involved
- If you are using the 'auditor method' of determining anti-detriment payments, the re-contribution strategy would be better.
Many of my clients are taking an active interest in their estate planning arrangements, and rightly so, as they wish to protect their family. Your superannuation benefits may be one of your largest assets upon your death, so plan ahead to ensure that your family can benefit from all the available rules that makes sense.
I hope you found this blog useful. As you have read, anti-detriment payments are a complex issue and so it's really important to seek professional financial advice to ensure you are making the correct decision before you invest in a superannuation fund.
To learn more about Darren, view his online profile.
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