The Australian Taxation Office has put one of the final pieces of the superannuation puzzle in place, ahead of the June 30 implementation of the pension transfer balance cap, releasing a guide to the tax and regulatory treatment of superannuation death benefits and death benefit income streams under the new regime.
The ATO’s Law Companion Guideline 2017/3, which was issued on May 8, spells out the difference between reversionary and non-reversionary death benefit income streams and how each will be treated under the new rules.
A death benefit income stream can be either reversionary or non-reversionary.
Reversionary death benefit income streams. The general rule is that a superannuation income stream ceases when the recipient dies. However, a reversionary death benefit income stream is a superannuation income stream that reverts to a reversionary beneficiary automatically upon the member’s death.
Some super funds have rules allowing for reversionary benefits and others don’t.
The ATO says that if you are the recipient of a reversionary death benefit income stream, a transfer balance credit arises in your transfer balance account.
The credit starts 12 months from the day the beneficiary becomes a recipient. This is to give the beneficiary time to adjust their affairs.
Non-reversionary death benefit income stream: A non-reversionary death benefit income stream is a new superannuation income stream created and paid to a dependent beneficiary or beneficiaries. Death benefit income streams are non-reversionary of the superannuation provider has the power to determine who the benefit is paid to, the form of the death benefit and the amount.
If you are the recipient of a non-reversionary death benefit income stream, a transfer balance credit arises if your transfer balance account on the later of July 1 or when you start to be the recipient of the income stream.
The transfer balance credit is the value of the superannuation interest that supports the income stream.
To reduce an excess transfer balance the recipient can choose to commute all or part of the death benefit or commute a superannuation income stream that is already in operation.
This is an important choice. If you choose to commute your own superannuation income stream, the commuted amount can remain within the superannuation system as an accumulation phase interest.
But if you choose to commute the death benefit income stream, the commuted amount cannot be retained as an accumulation phase interest and the commuted amount must be aid out of the superannuation system as a lump sum.