By Monica Rule

Considering there is talk of the government getting rid of the anti-detriment payment law, I thought I would explain what it is in case you want to make an anti-detriment payment from your Self Managed Superannuation Fund (SMSF) while you still can.   

In order to understand the law, I need to first explain why the law was introduced. Prior to 1 July 1988, a superannuation fund did not pay tax on deductible contributions. Benefits payable from a superannuation fund were (in respect of service after 30 June 1983) taxed at 30%. A lump sum death benefit, paid to a dependant, was paid tax free. 

Then, from 1 July 1988, the government decided to bring forward the taxation of superannuation funds by introducing a 15% contribution tax and reducing the 30% tax payable at the benefit phase to a 15% tax by way of compensation. This meant that a lump sum death benefit payable to a dependant was no longer entirely tax free because a 15% contribution tax had been applied to the money.

Therefore, the new tax arrangement only benefited members who survived long enough to enjoy the lower tax at the benefit phase and did not compensate the beneficiaries of members who died during the accumulation phase.  In these cases the deceased member’s beneficiaries were detrimentally affected – hence the term “anti-detriment payment”.

To compensate the deceased members’ beneficiaries, the anti-detriment law was introduced. The law restored the deceased member’s lump sum death benefit to what it would have been if the 15% contribution tax had not been paid.

The law works by allowing dependants of the deceased member to receive an increased death benefit via an additional lump sum payment (i.e. anti-detriment amount) from the SMSF and provides a refund of the contribution tax paid, through a tax deduction to the SMSF.

The tax deduction available to the SMSF is the anti-detriment payment amount grossed up to reflect the 15% contribution tax.  This is so the reduction in tax payable by the SMSF is equivalent to the anti-detriment amount.  The 15% contribution tax refund is not paid as a cash refund by the ATO, instead it provides a tax deduction claimable by the SMSF.  For example, if an SMSF makes an anti-detriment payment of $60,000, it will be entitled to a tax deduction of $400,000 (i.e. $60,000 divided by 15%).  

The SMSF is able to claim a tax deduction, which reduces the SMSF’s assessable income and potentially provides a tax saving equivalent to the anti-detriment amount.  If the tax deduction cannot be fully used in the year that the anti-detriment payment is made, it can be carried forward to offset a tax liability in future years. This means any excess deduction not used can be carried forward as losses for future use.

There is no legal obligation on an SMSF trustee to make an anti-detriment payment as it can be paid provided the trust deed of the SMSF allows for it.  However, most SMSFs are unable to make such payments, as the funding of an anti-detriment payment cannot be made from the deceased member’s superannuation account (Regulation 5.08 SISR – member’s minimum benefit must be maintained) or other members’ superannuation account (not even temporarily) and is normally made from reserves maintained by an SMSF.  If an SMSF has no reserves, then it is unlikely to be able to make the payment.  SMSFs must have sufficient cash or capital to pay the anti-detriment amount to the beneficiary.  The trustees need liquidity in the SMSF to make the additional payment.

There are three ways to fund an anti-detriment payment:

1. Tax Savings in the year of payment:  as the increased death benefit payment is an immediate tax deduction to the SMSF, an anti-detriment payment can be sourced from the tax liability of the SMSF in the year of payment, provided there is sufficient cash available to make the payment.
2. Temporary borrowing:  an SMSF can temporarily borrow money to pay a beneficiary.  The borrowing period is limited to 90 days and the borrowing amount must not exceed 10% of the market value of the SMSF’s assets. 
3. Reserves: an anti-detriment payment can be created over time from SMSF investment returns. If a reserve is used, the SMSF must have a documented reserving strategy. The anti-detriment payment cannot be made directly from a reserve to a beneficiary.  The amount must be allocated to the member’s account.  Allocations from a reserve in excess of 5% of the member’s interest are counted against the member’s concessional contribution cap. Also, where an SMSF is in pension phase, the earnings on the reserve do not receive the pension tax exemption and are taxed at 15%.

An anti-detriment payment can only be paid to a spouse (including same sex couples), former spouse, and children (any age, includes step children and adopted children) of the deceased member or to the estate provided the ultimate beneficiaries are these people.

An anti-detriment payment can only be paid with a lump sum death benefit and not with a pension (unless the pension is commuted within the prescribed period (i.e. 6 months from death or 3 months from the grant of probate whichever is later)), although the deceased member can be in either accumulation or pension phase prior to their death.   An anti-detriment payment is not available on a terminal illness benefit prior to death.  In addition, it is only payable by an SMSF that has always been a regulated, complying superannuation fund.

Most SMSFs’ accounting records do not track the contribution tax paid on individual members’ superannuation accounts and therefore details are often not available to calculate the anti-detriment payment. The superannuation law does not provide a method to calculate the anti-detriment amount.  However, there are several accepted methods for calculating the anti-detriment amount.  The most common method used is the formula method (described in Tax Office publication ATO ID 2010/5) based on the taxable component and service period of the deceased member.

The formula is [(0.15 x P) / (R – 0.15 x P) x C] where:
R is the total number of days in the eligible service period post 30 June 1983 up to the date of payment.
P is the number of days in component R that occur after 30 June 1988 up to the date of payment.
C is the taxable component of the lump sum death benefit excluding any insurance proceeds for which tax deductions on premiums have been claimed.

Is there any tax payable on an anti-detriment payment?
An anti-detriment payment forms part of the taxable component of a lump sum death benefit.  Therefore, if the lump sum death benefit is paid to a dependant such as a spouse, former spouse or a minor child, the entire lump sum death benefit including the anti-detriment payment will be tax free as the beneficiaries are dependants for tax purposes.  If, however, an anti-detriment payment is made to an adult child who is classified as a non-dependant then it will be taxed at 15% plus the Medicare Levy in line with the tax normally payable by a non-dependant beneficiary on the taxable component of a lump sum death benefit.

Please remember that an anti-detriment amount must be first paid from an SMSF before a tax deduction can be claimed. 

Caution:  It is the ATO’s view that any amount credited from a reserve (any type of reserve), for the purposes of an anti-detriment augmentation, counts as concessional contributions of the deceased member unless the amount is less than 5% of the member’s account balance before the reserve amount is allocated.  This is because any payments from a reserve that is:

• not paid on a pro rata basis (i.e. fair & reasonable) to all members of an SMSF, or;
• increases the deceased member account by 5% or more

will be grossed up and counted against the deceased member’s concessional contributions cap.  This means that $85 from a reserve will be regarded as $100 for the purposes of the cap.  Therefore, if the amount paid is to be counted against the caps then the tax outcome will depend on the deceased’s circumstances. However, since 1 July 2013 where excess concessional contributions are able to be included in the member’s assessable income and taxed at the member’s marginal tax rate plus interest, the benefits of creating a large tax deduction may outweigh the cost of any excess contributions tax payable - especially if the deceased member has little or no assessable income (i.e. they are aged 60 or over and drawing an account based pension).

Must an anti-detriment payment be paid in full in one instalment?
The compulsory cashing of benefits superannuation rule (Reg. 6.21(2) & 6.25(2)) does allow an SMSF to pay up to two lump sums – an interim payment of a portion of the benefit when the member’s entitlement arises and the remainder of the benefit when the amount is finally ascertained. 

However, in order to satisfy the anti-detriment rule, if more than one instalment of a death benefit is paid to a dependant, then each lump sum paid must include the anti-detriment/tax saving amount.  Then, as long as the amount added to each death benefit equates to the anti-detriment amount calculated for each payment, the SMSF would be able to claim a tax deduction for each payment.   Therefore, if two instalments are made, either or both payments may be increased by the anti-detriment amount.

If the amount of the increased death benefit is too high to fund, then there is a process where the trustee can reduce the amount to a more manageable level.  Spouses and minor children may receive a pension as well as a lump sum death benefit so that the amount of the lump sum may be reduced by paying part of the death benefit as a pension.  This strategy is not available to adult independent children who are not entitled to a death benefit pension.

Gold and Platinum members please read on for the usual result of the anti-detriment formula method, situations not suitable for an anti-detriment payment, as well as how the re-contribution strategy and anti-detriment payment can work against each other.

Monica Rule specialises in providing advice on SMSF compliance to professionals and trustees through her advisory business – Monica Rule – Your Self Managed Super Expert. www.monicarule.com.au

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related Docs:

• Pension Pack for Self Managed Super
• Investment Strategy for Self Managed Super
• SMSF - Deed Update
• Self Managed Superannuation Fund Deed

Related Webinars

• Webinar Recording - Investment Restrictions For Self Managed Superannuation Funds
• Webinar Recording - SMSFs And Related Party Loans
• Webinar Recording - Pitfalls That SMSF Trustees Should Avoid