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Anti-detriment abolition: death duty on the sly

Among the budget measures aimed at making super more sustainable, the abolition of anti-detriment benefits was little noticed, and even less remarked.

On their own, super and tax disengage most people, given their complexities and the need to forgo current cash flow. Combined, they are positively off-putting.

Anti-detriment benefits combine the demerits of both, go back decades, involve convoluted calculations that would do an actuary proud and are complicated. No wonder many trustees, not to mention members, have not been up to speed in the arcane formulae.

What is anti-detriment?

In July 1988, Paul Keating as Treasurer had to fill a revenue hole with super (sound familiar?) and decided to bring forward half the 30% tax that was payable on accumulated super. The 15% tax on super contributions was born.

In introducing the contributions tax, he had to tackle the fact that tax was not payable on death benefits. By bringing it forward, he had created a detriment for those savers who might die and hence take a death benefit.

Solution: he enacted the anti-detriment benefit whereby funds would top up any death benefits payable by the amount forgone as a result of paying contribution taxes from 1 July 1988 until death. After so topping up, the fund in its tax return would claim a deduction by grossing up the payment for the fund tax rate of 15%. This would fully recompense the fund for the top-up. The top-up allowed for the refund of not only the contribution taxes, but also earnings thereon.

Over time, many funds started providing the top-up. This is perhaps because the trustees realised that they owed a fiduciary duty to act in the best interests of the members by clawing it back from the ATO. APRA had routinely pointed this out (see pages 8 to 10 of this APRA document).

For a full explanation, see Monica Rule’s Cuffelinks article ‘Tax paid by your SMSF can be returned to your dependants’ (February 5, 2015).

Myths abound, now it’s to be abolished

Given the large and increasing burden on the budget, the authorities have not been enthusiastic about funds claiming the benefit. A number of requirements (hurdles) have been imposed, some reasonable and others not.

To claim, the funds must first pay the top-up. The sourcing of such payments (from reserves?) has been questioned, especially in SMSFs and two member funds in getting the tax refund. Once funds realised the competitive advantage of paying it and claiming it from ATO, the claims have become routine.

According to the budget papers, the integrity and fairness of the system will be improved by removing the ‘outdated’ anti-detriment provision from 1 July 2017. It is inconsistently applied by superannuation funds and removing it will better align the treatment of lump sum death benefits in super and the treatment of bequests outside super. Plus, it will generate revenues of $350 million over 2017/18 and 2018/19.

What does it all mean?

  • A beneficial measure aligned with Australia’s aversion to death duties has been removed without mentioning its re-introduction.
  • For most members the benefit would be large and with further contributions, mounting. Those subject to the higher 30% contribution tax rate would be eligible for a higher top-up.
  • Non SMSFs would have no problem paying it and claiming off the fund’s liability.
  • Many SMSFs would also be able to pay and claim.
  • If current taxable income cannot absorb the grossed-up deduction, a tax loss can be carried forward to cushion future fund taxable income including contribution taxes.
  • The removal is not just for accruals after July 2017, but a total abolition. Translation: full-blown retrospectivity.
  • The budget impact of $350 million is only over two years. Being an ongoing benefit (before its abolition), the real impact will run to billions of dollars.
  • Like a life insurer repudiating future death claims after having received premiums, the Government having collected the contribution taxes (‘the detriment’) from members since entitled to a death benefit, is now declining to payback. If the Treasury was regulated by APRA, the prudential concerns would be loud and ear-filling.
  • Whether this involves acquisition of the contingent right to future top-ups without compensation, and hence might fall foul of the constitutional requirement under section 51(xxxi) of ‘just terms’, is a matter for constitutional experts. Where is the fictional QC Lawrence Hammill (of ‘the Castle’) when we most need him pro bono?
  • More plausible is the case for the estates of deceased members who were not paid the top-ups since 1988 suing the trustees for breach of fiduciary duties and compensation, resulting in cascading claims on the ATO. In the age of champerty, class action lawyers and litigation funders, this prospect is real.

Will the change be waved past due to lack of understanding?

Has the Government perhaps triggered more trouble than it is worth by this move? Should the anti-detriment dog have been left alone in its slumber? Or do so few people understand it that it will be swept under the carpet?

Of greater concern, the measure imposes a burden on deceased estates. Nothing wrong with that, as I have argued in the past for an open inheritance tax regime in previous articles, such as ‘Death duties, where angels fear to tread’ and here.

What is unseemly is the back-door approach in the hope this will pass unnoticed, relying on the widespread disengagement. Its sibling, disenchantment, may not be far behind. Does the move presage a political courage to introduce inheritance taxes down the road? Only a cash-strapped future treasurer can know.

The silence from the industry and the professions is deafening.

 

Ramani Venkatramani is an actuary and Principal of Ramani Consulting Pty Ltd. Between 1996 and 2011, he was a senior executive at ISC/APRA, supervising pension funds.

6 Comments
Ramani
May 14, 2016

All for cleaning up this and other unsustainable measures, but transparently.

Equity, sense, symmetry and reciprocity are alien concepts in most tax regimes. Try defending a tax bill with the unfairness argument.

Why else is there such silence about keeping the franking rate of 30% unchanged while small business tax rate went to 28.5%? Akin to the point above.

Michael
May 13, 2016

Let's face it - anti detriment should have gone long ago, in fact it should never have been brought in back in 1988. In some cases it effectively gives back all the contributions tax that you have paid - what sense does that make! Even the beneficiaries of people joining the workforce now would have been eligible for it if the member passed away in 40 years time. It's about time it went and let's just put it down to a past windfall which had to stop.

People whinge too much about such changes and they are the ones who also want the government to provide good services - hello, is there a mismatch here?

Another small point - if you give back the 15% tax to people earning under $37k, which we do now and the Coalition will continue to do, it is ludicrous to ALSO have the current anti-detriment benefit formula in place - under that formula, the fact that the person has effectively not paid tax (because they did pay it but it got refunded) is not taken into account, so the current law effectively pays back for these people more than they ever paid!

Glad it's gone - in fact I'd rather it went from now.

Ramani
May 13, 2016

Keith B

By letting people inherit fortunes taxfree, the current system burdens the living. Not consulting me is ok (I too am picky about my clients...) but suggesting the ATO inheritance taxes would affect the dead is insulting intelligence (it only affects the residual legatees).

Given your antipathy to death duties (but presumably not life taxes), how do you feel about the proposal: the issue under focus here?

KeithB
May 13, 2016

We're taxed out of existence whilst we're alive and you are suggesting we should be taxed when we die? I won't be consulting Ramani Consulting Pty Ltd.

Ramani
May 12, 2016

David, the integrity you represent (namely, the abolition is justified given the unsustainably extravagant tax subsidies since provided by the much forgotten, and unlamented taxpayer - us!) is what has been missing. If politically practised, it would earn some credibility amidst all the wailing about lost trust.

If the Treasurer had said so, and boldly declared that this death duty is warranted given the untaxed life and death benefits, many would have - even if reluctantly - seen the rationale.

I had said death duties are not a problem, in fact they are required. Treating the public as mushrooms or mugs (mushrooms in mugs?) is what I objected to.

David
May 12, 2016

Ramani, thanks for a very detailed and no doubt accurate description of not just the "trees", but also the "branches" and the "twigs" of this subject. Unfortunately you seem to have completely missed the forest.

Since 1988 there have also been a slew of other changes which have ultimately made superannuation extremely advantageous from a tax and wealth accumulation point of view. This has benefited not just retirees, but also their death benefit beneficiaries who have inherited the residual of balances significantly boosted in size by those many other changes to super. In that context, the anti-detriment benefit is an overly generous anachronism, and no longer appropriate. Getting rid of it is a sensible measure in the overall scheme of things.

To call its abolition a "death duty on the sly" is the sort of deceptive sensationalism I'd expect from the new look Fairfax, not a Cuffelinks contributor.

 

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