Richard Atkinson

The removal of anti-detriment payments, announced in the Federal Budget and effective from 1 July 2017, will have a profound effect on non-dependant beneficiaries receiving death benefit payments from un-taxed elements of superannuation funds. This is now commonly known as “Australia’s Death-Tax by Stealth”.

Prior to 1 July 2017, where trustees allow it, it is possible to re-claim the ‘lump-sum’ tax of 17% paid on these funds by claiming anti-detriment payments. This will not be possible after 1 July 2017.

An alternative strategy is the use of an Investment Bond facility to make a ‘Binding Nomination’. This can be implemented if the superannuation fund member is approaching the end of his or her life (perhaps due to illness) with a life expectancy of say, 3 to 5 years.

The member withdraws his or her super, including the ‘untaxed’ element, and invests into an Investment Bond. He or she then makes Binding Nominations to their ‘non-dependant’ beneficiaries (they do not have to be family) with the intention that upon passing, all benefits are paid to the recipient ‘tax-free’.

Whilst there is less tax being paid in the superannuation fund than within the Investment Bond, provided the member does not live beyond expectations, the amount of tax-paid within the Bond should not exceed the ‘lump-sum’ tax they would otherwise have to pay if received as a superannuation death benefit.

Below is a ‘live-case’ study from an actual investor using an Austock Life Investment Bond.

Scenario:

• Richard is 82 and in failing health.
• He has $500,000 in an Account Based Pension with a taxable component of $250,000.
• He has no dependants.
• Funds will go to non-dependants on his death.
• Based on the current components, Death Benefit tax of $42,500 will apply.

Strategy – Establish an Insurance Bond in Richard’s name

• Redeem super – tax free as over 60. Make binding nominations.
• On Richard’s death, the Bond matures and is paid tax-free to beneficiaries regardless of the Bond year.
• Tax paid within Bond. Approx. 5 year breakeven point* when compared with funds remaining in super + death tax.

* Based on $500,000 Investment Bond investment in the Conservative Fund assuming gross annual return of 5.84% and internal portfolio tax rate of 27.5%.

Benefits:

• Save $42,500 in tax.
• Non-contestable.
• Nominated beneficiaries can be anyone.

By Richard Atkinson, Head of IFA Product and Relationships

The post “Australia’s Death-Tax by Stealth” – can it be managed? appeared first on AdviserVoice.