On 13 February 2017, the ATO released Draft Law Companion Guideline LCG 2017/D3. This Draft Guideline deals with the treatment of superannuation death benefit income streams under the $1.6 million pension transfer balance cap from 1 July 2017.
Where a taxpayer has amounts remaining in superannuation when they die, their death creates a compulsory cashing requirement for the superannuation provider. This means the superannuation provider must cash the superannuation interests to the deceased person's beneficiaries as soon as possible. The payment of superannuation interests after the person's death is called a superannuation death benefit.
Where a superannuation interest is cashed to a dependant beneficiary in the form of a death benefit income stream, a credit arises in the dependant beneficiary's transfer balance account under s 294-25(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The amount and timing of a transfer balance credit for a death benefit income stream depends on whether the recipient is a reversionary or non-reversionary beneficiary.
The Draft Guideline states that a reversionary death benefit income stream is an income stream that reverts to the reversionary beneficiary automatically upon the super fund member's death. That is, the income stream continues, with the entitlement to it passing from one person (the deceased member) to another (the dependant beneficiary) under the rules of the fund. On the other hand, a non-reversionary death benefit income stream is a new superannuation income stream created and paid to a dependant beneficiary where the trustee exercises a power or discretion to determine an amount in the beneficiary's favour: see Taxation Ruling TR 2013/5.
Transfer balance credit: reversionary pension
For a reversionary death benefit income stream, a credit will arise in the recipient's transfer balance account 12 months after the original super fund member's death. If the reversionary income stream commenced before 1 July 2017, the credit will arise on the later of 1 July 2017 or 12 months after the death of the original member.
The credit that will arise in the reversionary beneficiary's transfer balance account is equal to the value of the superannuation interest on the day when it first becomes payable to the reversionary beneficiary (ie at the date of the death); or just before 1 July 2017 if the income stream commenced before that time.
Transfer balance credit: non-reversionary pension
For a non-reversionary income stream, a credit will arise in the recipient's transfer balance account on the later of 1 July 2017 or when the person becomes entitled to be paid the income stream. The credit is the value of the superannuation interest at the time it commences, or just before 1 July 2017 if it commenced before that time. The ATO notes that the value for non-reversionary pensions may include any investment earnings that accrued to the deceased member's interest between the date of their death and the time the death benefit income stream commences.
Nathaniel commences a pension worth $1.4 million on 1 October 2017. The rules of the pension do not provide that it may revert to another person on Nathaniel's death. Nathaniel dies on 1 January 2018. The value of the superannuation interest supporting the pension at the time of Nathaniel's death, 1 January 2018, is $1.3 million. Nathaniel had no other superannuation interests.
Malena is Nathaniel's spouse and only beneficiary. On 15 June 2018, she is advised she is entitled to all of Nathaniel's remaining superannuation interest. During the period between Nathaniel's death and the death benefit income stream payment to Malena commencing, $1,000 of investment earnings accrued to the interest, bringing its total value to $1,301,000. The value of the superannuation interest supporting the death benefit income stream when it commences on 15 June 2018 is $1,301,000.
A transfer balance credit arises in Malena's transfer balance account on 15 June 2018. That transfer balance credit is equal to the value of the superannuation interest supporting the death benefit income stream on 15 June 2018 (ie $1,301,000).
To reduce an excess transfer balance so that it does not exceed the general transfer balance cap ($1.6 million for 2017–2018), an individual can choose to commute either (fully or partially):
- the death benefit income stream; or
- a superannuation income stream that the individual already has in retirement phase.
If an individual choose to commute their own existing superannuation income stream, the commuted amount can remain within the superannuation system as an accumulation interest. However, if the individual chooses to commute the death benefit income stream, the commuted amount cannot be retained as an accumulation phase interest and the commuted amount must be cashed out as a lump sum death benefit.
Source: ATO, Law Companion Guideline LCG 2017/D3, 13 February 2017, https://www.ato.gov.au/law/view/document?DocID=COG/LCG20173/NAT/ATO/00001.