What is an anti detriment payment?
In 1988 the federal government introduced a 15% tax on superannuation contributions (which prior to that had been untaxed). To compensate for this, the government also reduced the tax on superannuation lump sum payouts by 15%. However because lump sum payments to a dependent on death had always been tax-free, this new contributions tax meant that death beneficiaries were unfairly treated, receiving a lesser amount of money than they would otherwise have been entitled to had the contributions tax not been introduced. To compensate for this a voluntary “anti-detriment” scheme was introduced, which is designed to facilitate the refund of the total amount of contributions tax paid by the super member during their lifetime.
For example, John has made contributions to his super fund totalling $200,000 and has paid contribution tax of $30,000. If John was to pass away now, his dependent beneficiaries would be left with $170,000 (plus earnings). In other words there is a detriment of $30,000.
Under the anti-detriment scheme, the superannuation fund has the option to pay the additional $30,000 to John?s beneficiaries and claim a tax offset for the same amount.
What should SMSFs trustees be aware of?
It is important to note that the anti-detriment scheme is voluntary – there is no legal obligation for super funds – SMSF or otherwise – to provide anti-detriment payments. Additionally, some funds may only make anti-detriment compensation to beneficiaries who are classed as a dependent of the deceased. Laura Menschik, Director of WLM Financial Services Pty Limited encourages Trustees to seek advice before acting. “I think that all aspects of superannuation should be considered by SMSF?s, however in considering anti-detriment strategies Trustees should seek legal and tax advice before commencement,” she says. “Also, Trustees will need to ensure that the trust deed allows for anti-detriment payment and should also be aware of who is nominated as beneficiaries and the effect to them of any payment.”
How to pay for it?
While anti-detriment payments can be claimed as a tax offset, SMSFs will need to have access to the funds in the first instance – and will also require sufficient earnings to be able to offset the cost down the track. Probably the two main strategies available to SMSFs to provide for a future anti-detriment payment are:
- To have an insurance policy for the purpose
- To gradually build up a reserve that can be used for that purpose.
Option one provides for a separate life insurance policy held against each member of the fund, which is not specifically linked to their account. The trust deed of the SMSF must then allow the Trustees discretion in determining the payment of the insurance proceeds. Ms Menschick advises that a potential complication with this strategy is that the tax deductibility of the insurance premiums may be lost. “The downside to the insurance policy strategy is that in providing the trustees with discretion, the premiums for the insurance policy will not be deductible to the fund,” she says. “This may be of concern if the trustees are to decide what to do with the insurance money.”
Option two – building up a reserve – is perhaps a more straightforward strategy. “Reserving may take time to accumulate enough to make the payment though,” notes Ms Menschik. There are also taxation implications as payments from a reserve can be counted towards a member?s concessional contribution cap. In all instances, taxation advice should be sought.
For the trustees of a SMSF, the most important thing is to be aware of the potential for future anti-detriment payments and to periodically review their position on these payments with their professional advisers.