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Tax exemption boosts confidence in SMSF industry

Krystine Lumanta  |  01 Nov 2012Text size  Decrease  Increase  |  

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Krystine Lumanta is a journalist with InvestorDaily, a Sterling publication.


The federal government's midyear economic and fiscal outlook's inclusion of a tax exemption for self-managed superannuation funds (SMSFs) will provide a great boost of confidence to the sector, according to DBA Lawyers.

The government will amend the law to allow the tax exemption for earnings on asset supporting superannuation pensions to continue, following the death of a fund member in the pension phase until the deceased member's benefits have been paid out of the fund.

It will have effect from 1 July 2012 and is estimated to have a small but unquantifiable cost to revenue over the forward estimates period.

The change will benefit the beneficiaries of the dependants of deceased member's estates by allowing superannuation fund trustees to dispose of pension assets on a tax-free basis to fund the payment of death benefits.

"The announcement in the midyear economic and fiscal outlook is great news for the SMSF industry and the government should be commended for its foresight and practical approach," DBA Lawyers director Daniel Butler told InvestorDaily.

"However, there are still reasons to ensure a pension is an auto-reversionary pension (ARP) to protect investors against adverse tax consequences. Quality SMSF documentation here is a key factor in achieving an effective strategy."

Most reversionary nominations were mere wishes and were not binding, thus to effect an ARP, a "locked-in" reversionary nomination must exist, Butler said.

"Typically, in an SMSF this requires a special deed that facilitates a nomination that binds a trustee's discretion," he said.

"Our experience over many years has shown that under most SMSF deeds we have reviewed, the binding death benefit nomination (BDBN) would prevail over a reversionary nomination.

"BDBNs are more specific as to death and are binding. A reversionary nomination, on the other hand, is typically discretionary and is effected at the time of a commencement of a pension."

An ARP typically needs to be "locked into" the SMSF governing rules to be effective and this could be done via a specially drafted SMSF deed with a reversionary nomination and/or by a suitably drafted BDBN, Butler said.

Furthermore, the next question was whether once the extended pension exemption announcement became law if an ARP "lock-in" reversion would still be required.

"Following the proposed change, interestingly, an ARP will not be required for the pension exemption to continue beyond a pensioner's death," Butler said.

"However, the Australian Taxation Office considers that an ARP was required for pensioners who died on or before 30 June 2012 to ensure the pension exemption continues beyond death.

"Therefore, strictly speaking, there appears to be no need for ARPs after 30 June 2012."

However, considering the proportioning rule in s307-125 of the Income Tax Assessment Act 1997, there can be significant advantages in ensuring each pension has a "locked-in" ARP, as it provides better protection against adverse tax and succession risks.

Unless there was an ARP in place, a tax-free pension would be combined with a taxable pension on a member's death in an SMSF, Butler said.