ATO releases final guidance on death benefits

The tax office released the finalised version of LCG 2017/D3, titled LCG 2017/3 Superannuation reform: Superannuation death benefits and the transfer balance cap, which provides guidance on the tax and regulatory treatment of superannuation death benefits and the treatment of death benefit income streams.

The guidance also addresses life insurance policies and income from non-reversionary pensions. 

“I think it’s more interesting for the reversionary pensions because when you’re looking at reversionary pensions, the value of that pension is at the death of the individual,” SuperConcepts executive manager of SMSF technical and private wealth, Graeme Colley, told our sister publication SMSF Adviser.

“So if the income or the proceeds of the insurance policies come into act as reversionary pension, that won’t be taken into account in the value of the reversionary pension because it’s valued at the time of death rather than some time down the track as a non-reversionary pension would,” Mr Colley said.

He said there are differences between these two types of pensions and, depending on which one you use, there may be advantages in the start-up period of these pensions.

In paragraphs 27 and 28, the guidance talks about a 12-month leeway with non-reversionary pensions, he explained.

“It’s talking about the fact that if income or life policies that come into the account, prior to the commencement of that reversionary pension, then it’ll be the higher value and that will be counted because it’s supposed to be the commencement date of the non-reversionary pension, but with the reversionary pension, it starts from the date of death,” Mr Colley said.

He also noted, for example, paragraph 14 which indicates that setting up a bank account for a reversionary pensioner won’t stop it from being a reversion, because of the automatic reversion provisions that are there.

“I think that’s a good thing because in some cases, while the payment is automatically going through after the death of the individual due to the automatic crediting of the pension, it would still go through to the account of the deceased for maybe one or two payments. The bank would then accredit it to the reversionary bank account,” Mr Colley said.

He added that it was a practical approach adopted by the ATO to the problem as it won’t stop the pension from being reversionary, even though there might be a small break between the time it was paid to the individual who died and when it goes through to the reversionary account after that. 

Paragraphs nine and 13 show how a reversion works.

“Some people in the industry are using the word automatic, [but] it’s just that there’s no choice of whether you take it or you don’t, or you take it in a particular form. It just goes straight through to you. I think that’s the right way to look at it,” Mr Colley said.