on 31-08-2016 06:13 PM - last edited on 01-09-2016 08:36 AM by olympia
With changes announced in the 2016 budget heralding the demise of the Anti-Detriment strategy it is time to look at the Future Service Benefits Deduction as a more practical alternative tax strategy for SMSFs and another example of where SMSFs may lead to better outcomes.
I hit a real low when I hear a client is Permanently Disabled or Terminally ill but in my field of work it is a matter of when not if we have to deal with such a situation. My reaction is to always want to make the best of the situation maximising the benefit for the client or their beneficiaries.
I have always looked at the anti-detriment deduction and wished there was something I could do for the client while living as well as helping their family afterwards.
Well I would like to thank David Busoli from Super Concepts for pointing me in the right direction a few years ago so I am passing it on. There is an alternative way for an SMSF to obtain a large tax deduction following the death/disability of a member.
The sources of guidance for this strategy are:
- section 295-470 of the Income Tax Assessment Act 1997 (ITAA97) “Complying funds deduction for future liability to pay benefits”; and
- section 295-485 “Deductions for increased amount of superannuation lump sum death benefit”.
- ATO ID 2015/17
This alternative Section 295-470 tax deduction is available to an SMSF and allows the fund to claim a deduction on payment of:
- a) a superannuation death benefit; or
- b) a disability superannuation benefit.
This tax deduction has a number of advantages over the anti-detriment deduction including the fact that it:
- is available following incapacity i.e. not just on death;
- does not require an additional payment to be made upon death/disability; and
- can also be claimed where the benefit is paid as an income stream (i.e. not restricted to lump sum benefits).
The Fund does need to hold an insurance policy to be entitled to claim a deduction for future liability. (previously a policy was not always required as an insurance reserve could be used but that is no longer possible and now a policy is required).
These deductions can only be claimed if the trustee elects not to claim a tax deduction for the insurance premiums in the current and future financial years. Now depending on the fund’s actual circumstances and the amount of the tax deduction, this may not be a problem.
This alternative tax deduction is calculated in accordance with the following formula and can be quite large, potentially resulting in surviving/future members not paying any tax on fund earnings for some years:
Benefit amount X Future service days / Total service days
Marie has been a member of her SMSF for 15 years when she is disabled in an accident at age 50.
Accumulated balance: $750,000
TPD Insurance cover: $1.0 million
Total benefit paid out: $1.75 Million
Marie’s fund makes the necessary election not to claim a tax deduction for insurance premiums in the year of her disability claim. Instead, the trustees will claim a tax deduction as follows:
$1,750,000 X 15 years future service /30 years total service = $850,000
This tax deduction of $850,000 is likely to create a tax loss for Marie’s fund. As this loss can be carried forward and used in future tax years, she and other members stand to enjoy the benefits of their SMSF not paying tax on future assessable income. To be really effective the funds needs to have members in the accumulation phase going forward which might prompt the mum and dad funds to bring in their children as the parents move into pension phase.
It is important to note that the SMSF trustee will not be able to claim tax deductions for insurance premiums on the life of any members in future years.
ATO ID 2015/17 - Could this strategy be used with hindsight
In ATO ID 2015/17 the ATO consider whether a trustee of a complying superannuation fund may make the choice under s 295-465(4) to claim a deduction for future liability to pay death benefits under s 295-470, after the death of an insured fund member.
The ATO answer is yes!.so that gives more flexibility to funds to claim this deduction.
There are some very specific hurdles that must be addressed to use this deduction in terms of connecting it to termination of employment and actually holding an insurance policy via your SMSF. So it is really important that the strategy is considered as soon as a terminal illness or injury is diagnosed and before any decisions are made on leaving work, starting pensions or taking lump sums.
Not something you will come across everyday so just park this in your strategies folder for that day that will inevitably come and this is a strategy that is very unlikely to be used by retail or industry super funds.