Amid all the rumours about changes to superannuation, one of the hottest is that the government will soon abolish the anti-detriment provisions.
I am referring to the ability of some superannuation funds to refund a lump sum to the member’s estate on death, in compensation for the 15% contributions tax that was deducted from their contributions during their working life.
How did this generosity start?
To understand how this unusual burst of generosity came about, you need to cast your mind back to July 1988, when Federal Treasurer Paul Keating introduced a 15% tax on deductible contributions to superannuation. Until then, there was a tax of 30% on exit, but no tax on entry.
Keating had promised there would be no new taxes during that term of government, so his method of changing the taxes was to chop the 30% tax in half, and put 15% on the front, leaving 15% on the back. Of course, the government claimed the 15% tax was not a new tax, merely a reshuffling of the existing one.
The new contributions tax was called 'detrimental' to qualifying dependants and, to compensate them, legislation was passed to enable all contributions tax paid to be refunded to the estate – hence the term 'anti-detriment provision'.
An anti-detriment payment can be made only to a spouse or former spouse of the deceased, a child of any age, or to the estate provided the ultimate beneficiaries are the spouse, former spouse or a child. It can only be made when an accumulation death benefit is paid as a lump sum, or when a pension is commuted to a lump sum on the death of a pensioner (or reversionary pensioner) within the prescribed period. This is usually three months from grant of probate or six months from the date of death.
Payments could be substantial
The calculation of the payment is complex, but in many cases the fund may use a simple formula. This is between 13.68% and 17.65% of the taxable component (excluding insurance) if the eligible service period commenced before 1 July 1988, and 17.65% for service that commenced after that date. For example, for a fund of $600,000, the anti-detriment payment could be $105,900.
As always, the devil is in the detail. The payment does not come immediately from government revenue but is created by allowing the fund a tax deduction. This means it comes from future tax payable by the fund.
Even though SMSFs can make an anti-detriment payment, it seldom happens in practice, because the payment must be made before the tax deduction can be claimed. Usually this means the fund needs to pay a benefit that is greater than the member’s account balance, and the fund needs to have substantial reserves to do this. Most don’t have them.
A worthwhile option, if you are in a position to do so, would be to withdraw a large chunk of your superannuation tax free after you turn 60, and then re-contribute it as a non-concessional contribution. For our $600,000 fund, this could increase the non-taxable component by $540,000 and reduce the tax that would be payable if the superannuation was left to a non-dependent, by $91,800. This would reduce the negative impact of any changes in the law.
Factors such as conditions of release, contribution caps and work tests all need to be satisfied, which is why expert advice is essential before adopting this strategy.
Another option, if you have an SMSF and think you are close to death, would be to roll the balance into a large retail fund. This fund may well have the ability to make an anti-detriment payment because it would be able to use up the tax concessions generated.
For some people, there is really nothing you can do to protect yourself against the removal of the anti-detriment provisions except cash in your super before your day of passing. That just leaves you the challenge of predicting this day, which should be easy compared to keeping up to date with superannuation changes.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. See www.noelwhittaker.com.au.