Death while in Pension Phase

This was the headline issue from the Draft Ruling.  The reasoning of the Draft Ruling was that on the death of the member who was in pension phase, the pension ceased as there was no individual entitled to pension payments, with the consequence that the superannuation interest which was previously supporting the pension now transferred to the taxable side of the fund.   

The Draft Ruling provided two exceptions to the transfer of the super interest to the taxable side of the fund.  The first was if the pension automatically transferred to another person.  This would be the case if the pension was reversionary.  The second was if a new pension immediately commenced to be payable from the super interest.  This would be the case if there was a binding death benefit nomination which required the benefit to be paid as a pension.

This view as to when a pension terminates is continued in the final Ruling.  However, the adverse tax implications arising from this view have been removed by changes to taxation legislation.  This change was originally announced on 22 October 2012 (as part of the Mid-Year Economic and Fiscal Outlook) and subsequently introduced as Income Tax Assessment Amendment (Superannuation Regulations Measures No. 1) Regulation 2012.

In broad terms, the super interest previously supporting the pension will, for taxation purposes only, continue to be on the tax exempt side of the fund for a reasonable period to permit the super interest to be paid out or a new pension commenced.  This treatment only applies if the super interest was supporting a pension at the death of the member and no pension is automatically payable from the interest.  Additionally, the tax free percentage applicable to the pension will apply to any superannuation payments made from the interest after the pension has terminated.

For superannuation purposes, the pension will terminate on the death of the member unless the pension is reversionary or a binding death benefit nomination applies which requires the benefit to be paid as a pension.