Have you ever sat in front of an adviser or accountant and been told that you should think about anti-detriment payments if you died? After the usual look of wonderment you may ask the obvious, “what the hell’s that?”, and be given a talk about the extra amount your spouse and children could receive as a clawback of tax paid on your superannuation contributions. You may even be told that you should compare it with the benefits of the recontribution strategy which just adds to the mystery of what you have heard. All worthwhile stuff, but what does it really mean?

An amount added to your death benefit superannuation lump sum to be paid to your spouse or children may sound good, but as usual, it depends on the individual’s circumstances, the SMSF’s cash flow and reserves and whether or not the SMSF will continue to have taxable income.

What is an anti-detriment payment and must they be paid?

An anti-detriment payment is the term given to an additional payment made to the surviving spouse or child of a deceased member, as part of the death benefit claim. In most cases it would be authorised by the trust deed and other rules of the superannuation fund. It is intended to largely represent a refund of the 15% tax paid on tax deductible contributions made for the member throughout their life.

It is interesting to note that there is no compulsion for superannuation funds to make anti-detriment payments on the death benefit lump sums of deceased members, rather it is a recommendation by the Australian Prudential Regulatory Authority (APRA).

When does an entitlement to an anti-detriment payment arise and how is it calculated?

Where a death benefit is paid as a lump sum to a spouse, former spouse or a child (of any age) of the deceased, it may be increased by an amount representing the anti-detriment payment. The anti-detriment payment applies only to death benefit lump sums and does not apply to superannuation death benefits taken as income streams.

To calculate the maximum amount of the anti-detriment that can be paid the ATO has provided a formula to assist with the calculation. It was published in ATO ID 2010/5 which was released in January 2010 as follows:

When is the payment made by the trustee of the superannuation fund?

The trustee of the superannuation fund pays the lump sum, including the anti-detriment amount, to the beneficiary at the time the death benefit is paid. The fund is able to recoup this amount by claiming a tax deduction against other taxable income of the fund.

In relation to SMSFs, anti-detriment payments can be problematic for a couple of reasons. First, the SMSF needs to have adequate cash flow and/or reserves to make the anti-detriment payment as the amount cannot be paid from the balances of other members. Secondly, the fund must continue to have taxable income to gain any benefit of the amount that can be claimed as a deduction. If the fund is to be wound-up after the death of the last member or if the fund is wholly in pension phase, there would be no benefit in making an anti-detriment payment.

Can a partial anti-detriment payment be made in certain circumstances?

Yes. A partial anti-detriment payment is able to be made where only a portion of the death benefit is being paid to a spouse, former spouse or a child of the deceased. The formula provided by the ATO is the calculation of the maximum amount of anti-detriment payment that is available and there is no mandatory requirement to pay the whole amount.

Take for example the situation where on the death of a member 60% of their superannuation death benefit will be paid to the member’s spouse and 40% of it will be paid to the member’s parents who have been classified as dependants for taxation purposes. The trustee of the fund is able to increase the lump sum to the member’s spouse by the amount of the anti-detriment payment that the spouse is entitled to receive. Whereas the parents of the member are not entitled to any anti-detriment payment as they are not the spouse or child of the deceased as required under the legislation.

How does an anti-detriment payment compare to a recontribution strategy?

A recontribution strategy involves withdrawing benefits from a member’s superannuation account and recontributing the amount back into the fund as a non-concessional (non-tax deductible) contribution. The benefit of the strategy is to convert taxable components of a person’s benefit into tax-free components. It is only possible to execute this strategy if the amount can be withdrawn from the fund, that is, a non-preserved benefit. A benefit in the fund will be non-preserved when a person reaches a condition of release such as permanent retirement or age 65, whichever, occurs first.

The recontribution strategy is a worthwhile estate planning strategy as it converts taxable components of a person’s account balance to non-taxable components. This is useful on the death of the member if part or all of a death benefit would have been taxable but after the execution of the strategy is tax free. Its main advantage is where non-dependants of the deceased, children 18 or older, receive a death benefit lump sum. In all other cases, death benefit lump sums are tax free in the hands of a dependant for tax purposes irrespective of whether the lump sum includes a taxable component.

The main disadvantage of the recontribution strategy is that it reduces the amount of anti-detriment amount payable. This is because the anti-detriment payment is calculated on the taxable component of the lump sum. As you can see it is a balancing act to decide which strategy will give the greatest benefit where non-dependants for tax purposes are to receive the benefit.

The following example explains the benefits of each.

Example

Peter has $400,000 of superannuation benefits of which 100% is taxable with an eligible service date of 1 July 1988 (when the member joined the superannuation fund).

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The above example shows that the net benefit to Peter’s spouse Andrea is higher than if a recontribution strategy was utilised. However, if John was to receive the death benefit lump sum it would be more advantageous if Peter had executed a recontribution strategy prior to his death.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.