Anti-detriment benefit phase out

Strategies

Monday 03 June 2019

The anti-detriment benefit is an increase to the amount of a lump sum benefit payable on death. It was introduced to offset the detriment caused by the introduction of tax on deductible contributions from 1 July 1988.

As part of the 2017 super reforms the law was amended to completely remove the payment of the anti-detriment benefit from 1 July 2019. Although the anti-detriment benefit is being phased out, it remains available where:

  • The member passed away prior to 1 July 2017
  • A lump sum death benefit is paid before 1 July 2019, and
  • The benefit recipient was the spouse, former spouse or child of the deceased at the time of death or payment. If paid to the estate, it is available to the extent one or more of those beneficiaries are likely to benefit.

As 30 June 2019 is not far away, consideration should be given to withdrawing benefits before 1 July 2019 that will attract an anti-detriment benefit. The analysis will generally aim to determine whether the benefit of the anti-detriment payment outweighs the potential negative aspects of having the funds outside of the superannuation environment.

The value of the anti-detriment benefit can be as high as 17.65% of the taxable component (element taxed) of a lump sum death benefit. Where the fund uses the formula method (see below) for calculating the amount of the anti-detriment benefit, the value of the anti-detriment benefit starts to decrease when the service period begins prior to 1 July 1988.

Where:

  • P = days in eligible service that occur after 30 June 1988
  • R = days in eligible service that occur after 30 June 1983
  • C = taxable component of death benefit excluding insurance

As noted above, to attract an anti-detriment benefit, the payment needs to be both a death benefit and a lump sum. Circumstances where a lump sum paid before 1 July 2019 might attract an anti-detriment benefit include:

  1. A lump sum paid from a death benefit pension where the deceased passed away prior to 1 July 2017
  2. The member passed away prior to 1 July 2017 however due to delays, the fund is yet to pay the death benefit
Example

Jane (age 70) is currently receiving a death benefit pension as a result of her husband’s death in 2016. The super fund has confirmed it will pay an anti-detriment benefit on lump sums paid before 1 July 2019.

The pension is currently valued at $600,000 with a taxable portion (element taxed) of $400,000. There were no insurance benefits. The service period started after 30 June 1988, so the value of the anti-detriment benefit will be approximately 17.65% of the taxable component.

If Jane commutes the pension and takes it as a lump sum, she will receive an anti-detriment benefit of approximately $71,000, meaning she will now have $671,000 to invest outside of the super environment as opposed to $600,000 in super.

Withdrawing funds from a pension account transfers those funds from a tax free earnings environment to a potentially taxable environment. A single person who is 65 years or older has an effective tax-free threshold of $32,914 when including the benefit of various income tax offsets. This means a substantial amount of assets can be held personally before the income generated from those assets will be subject to tax. However, the decision to remove funds from superannuation should be made in light of the client’s overall position; taxation is only one aspect of this position.

Example continued

Investment earnings on Jane’s death benefit pension are tax free however earnings when invested outside the superannuation environment will be subject to tax at personal marginal tax rates.

Where the income outside of super is subject to tax, it will take some time for the additional tax liability to exceed the benefit of the anti-detriment amount.

Modelling the alternative scenarios reveals that Jane is better off taking the death benefit lump sum, attracting the anti-detriment benefit, and invest the proceeds in her own name. A key assumption to this comparison is Jane having no other taxable income in her own name. Refer to Appendix for all assumptions used in these projections. A change to these assumptions may result in a better outcome where the pension is retained.

As part of the decision-making process, consideration could be given to the taxation of the benefit when it is paid on the death of the current pension recipient. In many cases the current death pension recipient is the surviving spouse who plans on leaving their death benefit to their adult children who are not tax dependants. When the taxable component (element taxed) is paid to an someone who is not a tax dependant, the taxable component is taxed at a maximum rate of 15% plus Medicare levy (no Medicare levy is paid where death benefit is paid to an estate).

Example continued

Jane has mentioned she would like to leave her death benefit to her independent adult daughter. If Jane were to pass away her daughter would be subject to tax of $68,000 on a taxable component of $400,000, leaving a death benefit of $532,000.

This is approximately $139,000 (ie $671,000 - $532,000) less than if Jane were to currently receive a lump sum death benefit, attracting anti-detriment, and subsequently pass away.

As it’s not known when Jane will pass away it is difficult to determine which option will be the ideal strategy in terms of Jane’s succession plan. Jane may not pay any tax herself however any unrealised capital gains on assets owned by Jane at the time of death will effectively be passed on to her daughter.

Modelling the various scenarios will assist in the decision-making process.

Where it is determined that retaining the death benefit pension is the best approach, consideration could be given to taking an ad hoc lump sum prior to 1 July 2019, particularly where funds are required in the near term and exceed the minimum pension requirement. In addition to the anti-detriment benefit, lump sums receive favourable treatment from a transfer balance cap perspective as lump sums are debited against the transfer balance account whereas pension payments don’t affect the transfer balance account.

Example continued

It was determined that Jane would be better off retaining the pension.

Jane plans on drawing a lump sum of $100,000 to fund some renovations commencing in October 2019. If Jane were to make the withdrawal before 1 July 2019, she would only need to withdraw $89,474 as the payment would be increased by an anti-detriment amount of $10,526.

Not all super funds pay anti-detriment benefits and those that do may not pay in all circumstances. For example, a super fund may not pay on lump sum death benefits containing death benefits rolled over from another fund. So it is important to check with the fund on a case by case basis.

The anti-detriment era is coming to a close and this is the last opportunity for certain clients to receive an increase to their death benefit where it is paid before 1 July 2019.


Appendix

The after-fees pre-tax projection rates used in this article are based on the asset class weightings, long term income and capital growth projection rates and other assumptions in the table below. 

These rates aren’t guaranteed, are provided as an illustration only, and may vary from actual results. The projection rates aren’t intended to be and shouldn’t be relied on when making a decision about a particular financial product. Before making any financial decisions you should seek personal financial advice from an Australian Financial Services licensee.

Assumptions

  • Jane has no other income in her own name
  • Jane’s personal tax calculation is based on standard individual marginal tax rates and incorporates the following:
    • Low income tax offset
    • Low and middle income tax offset
    • Seniors and Pensioners Tax Offset
  • 50% CGT discount applied to all realised capital gains in non-super portfolio
  • No tax is payable on returns in Jane’s death benefit pension

Minimum pension is paid from the death benefit pension. An equivalent amount is drawn from the non-super portfolio. In both cases this amount is spent by Jane.

Projection rate assumption - Balanced portfolio example
After-fees pre-tax return of 6.72% per annum

Asset allocationCapital growthIncomeFranking levelTax freeTax deferred
Australian equities 30% 5.0% 3.5% 60%
Property 10% 2.0% 7.0% 0%
Cash 5% 4.5%
Australian fixed interest 20% 6.5%
International equities 25% 7.0% 2.5%
International fixed interest 10% 6.0%
Totals 100% 3.45% 4.5% 18% 0% 2%
Fees 1.5%
Earning rate pre-tax 3.45% 3.0%
Asset turnover rate per annum 20%

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