How to Leave your Family an Extra Legacy

Superannuation - Additional Payment

The anti-detriment deduction was introduced under section 295- 485 of the ITAA to provide compensation to a spouse, former spouse (via the Estate) and children of such members by allowing them the opportunity to receive an increased death benefit by way of an additional lump sum payment from the fund. This payment was intended to replace the reduction in any lump sum payment caused by the contributions tax. It only applies to benefits paid as a lump sum. Benefits paid as pension income streams are not eligible.

The anti detriment payment is based on a calculation, an amount of lump sum payment, sourced from the 'taxable component', paid to the relevant beneficiary. If however, the fund holds 'non-taxable' component (perhaps via recontribution of the fund components, converting taxable to non-taxable), then the calculation will provide a nil result.

Not all APRA funds allow anti detriment payments. Virtually all SMSFs do however it can be difficult for SMSFs to fund the payment. This is because the compensation is provided via a tax deduction mechanism which requires the SMSF to make the payment before it can be recouped from the ATO. The recoupment is via tax savings. In addition the increased death benefit or anti detriment payment must be made from a source other than the deceased member's account.

The tax deduction available to the fund is the anti-detriment payment grossed up to reflect the 15% tax deduction.

A Simple Example

If the Fund had received $100,000 in tax deductible contributions it would have paid $15,000 in contributions tax, so an increased lump sum death benefit (anti­ detriment) payment, for example, of $15,000 to a spouse, ex-spouse or child of the deceased will provide the Fund with a $100,000 tax deduction. This will create a saving of $15,000 in tax on the next $100,000 in taxable income, including concessional contributions, the Fund receives. This will allow the payment to be recouped.

The problem is that whilst the payment cannot be sourced from the deceased's member account it must be made before it can be recouped.

There are 3 payment sources:

  1. Future income tax benefit to be claimed against the Fund's future taxable earnings
  2. Any tax liability in the year of payment, eg liability for contributions tax
  3. Reserves - may be created over time from Fund returns or by an appropriately arranged life insurance policy. In any case payments from a reserve that do not increase the deceased member account by 5% or more will not incur additional taxes.

Other Issues

An anti-detriment payment must be paid in full. A partial payment is not allowed.

If an anti-detriment payment is made then the income tax deduction will attach to the fund for the benefit of current and future members. This includes all assessable income both earnings and contributions tax. Care should be taken where a member is in pension, as the deduction may be ineffective.