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  • Clarification on reporting and paying death benefit rollovers

    On 22 June the Treasury Laws Amendment (2019 Measures No. 3) Act 2020 amended the law retrospectively with effect from 1 July 2017 to ensure any untaxed element determined in accordance with section 307-290 of the Income Tax Assessment Act 1997 (ITAA 1997) is not included in the receiving fund’s assessable income.

    A transferring fund is still required to apply section 307-290 of the ITAA 1997 to determine if there is an untaxed element in the lump sum being rolled over where they have claimed, or will claim in relation to the benefit, deductions for premiums for certain types of insurance under section 295-465 or 295-470 of the ITAA 1997.

    However, where a dependant beneficiary rolls over a death benefit, it is the Commissioner’s view that there is insufficient connection between any deductions claimed by the transferring fund and any lump sum benefits paid by the receiving fund from the dependant beneficiary’s new pension interest, for section 307-290 of the ITAA 1997 to apply to any of those subsequent payments.

    That is, where the receiving fund does not claim any deductions for any death and disability insurance offered to the dependant beneficiary as part of their new pension interest in the receiving fund, section 307-290 of the ITAA 1997 will not apply to any lump sums paid from that interest.

    In light of this, the Commissioner considers funds should report death benefit rollovers in the manner set out below.

    Reporting death benefit rollovers

    Rollovers from a fully taxed superannuation funds

    When completing item 16 of the death benefits rollover statement it is not necessary to include an element untaxed in the fund. Any amount that is determined under section 307-290 can be reported as a taxable component – element taxed in the fund.

    Rollovers from an untaxed or hybrid fund

    When completing item 16 of the death benefit rollover statement it is only necessary to report a taxable component – element untaxed in the fund to the extent it is not determined pursuant to section 307-290 of the ITAA 1997.

    Case Study

    Anthony is 57 and a death benefit beneficiary. Anthony’s spouse was 64 when they died, Anthony chooses to rollover the death benefit from their SMSF (a fully taxed fund) to an APRA regulated fund and start a pension in the APRA regulated fund.

    The death benefit is $200,000 and has a tax free component of $10,000. As the SMSF had claimed deductions for death and disability insurance; applying section 307-290 of the ITAA 1997, an untaxed element arises of $1,000.

    When completing the death benefit rollover form:

    • At Label 11 the trustee will enter code Q
    • At Label 16 the trustee will report:
      • a tax free component of $10,000 and
      • a taxable component – element taxed in the fund of $190,000.
       
    End of example

    Paying death benefits from a fully taxed fund after receiving a rollover

    Where a receiving fund has received a rollover death benefit the dependent beneficiary’s interest in the receiving fund will only comprise the tax free component and the taxable component.

    This is the case regardless of whether an untaxed element has been reported in the rollover benefit statement or not.

    Where the receiving fund does not claim any deductions for insurance premiums under section 295-465 or 295-470 of the ITAA 1997 in respect of the dependent beneficiary as part of their new interest, section 307-290 of the ITAA 1997 will not apply to any superannuation lump sum paid from the superannuation interest. The lump sum may comprise solely tax free component and taxable component – taxed element.

    Where the receiving fund claims a deduction for insurance premiums under section 295-465 or 295-470 of the ITAA 1997 in respect of insurance offered to the dependent beneficiary as part of their new interest, the fund will be required to apply section 307-290 of the ITAA 1997 to any subsequent death benefit lump sums paid from that interest.

    Paying a death benefit from an interest where a fund reported an untaxed element on or after 1 July 2017

    A fund may have previously received a rollover benefit statement reporting an untaxed element.

    Where the receiving fund can clearly ascertain that the rollover was from a fully taxed fund and the untaxed element was only reported due to it being determined in accordance with section 307-290 of the ITAA 1997, the trustee can treat this amount as being a taxable component-element taxed in the fund back to the date of the rollover.

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      Last modified: 08 Oct 2020QC 63871