Partial Anti-Detriment Payments

Anti-detriment payments are supplementary payments made to “reverse” the impact of contributions tax on the amount of a lump-sum death benefit paid from SMSFs.  There have been two issues relating to anti-detriment payments for SMSFs.  The first is how to finance such payments.  The second is whether a partial payment could be made.  Typically, SMSFs do not have sufficient unallocated cash to make a full payment.

To illustrate how these payments work, let’s assume Bill joins an SMSF and his employer immediately makes a $50,000 concessional contribution for him (being aged 50 or more).  On receiving the contribution, the SMSF would first deduct the 15% contributions tax and credit Bill’s account with $42,500.

If Bill were to die shortly after the contribution was made, the SMSF would pay a lump sum superannuation death benefit of $42,500 to Bill’s spouse.

The anti-detriment payment is intended to reverse the impact of contributions tax on Bill’s death benefit.  In this example, Bill’s death benefit has been reduced by $7,500.  The impact of earnings and fees has been ignored for the sake of simplicity.

The impact of contributions tax on Bill’s death benefit is reversed by the SMSF paying a supplementary payment to Bill’s spouse of $7,500.  The SMSF will then be entitled to a deduction of $50,000 (the amount of the supplementary payment divided by 15% being the SMSF tax rate).  If this deduction can be fully claimed against the SMSFs’ other assessable income, the SMSF will have been refunded the supplementary payment amount by a reduction in current or future tax which would have otherwise been payable.

The first issue with such payments is that the SMSF must have spare capacity to pay, in Bill’s case, $7,500.  Generally, unless the SMSF has prepared for this day by building up reserves or by the fund taking out excess life cover on Bill, the SMSF simply does not have such spare cash to pay the supplementary payment.

The second issue is whether the SMSF had, say, a spare $2,025 could it at least make a partial supplementary payment?  While $2,025 is not as good as $7,500 it is better than nothing.  And the SMSF will eventually obtain a tax deduction of $13,500 (ie $2,025 divided by 15%).

There has been some uncertainty as to whether such a partial anti-detriment payment could be made.  Initially there was a view that only the full anti-detriment amount could be paid: an all or nothing approach.

Recent comments by the ATO (in the March 2011 minutes of the National Tax Liaison Group – Superannuation Technical Sub-Group) now suggest that a partial anti-detriment payment can be made.

In the present case, if about 27% of the $42,500 was paid to Bill’s spouse as a lump sum and the balance as a pension (the pension can be commuted to a lump sum within the 6 months time limit to receive a tax free commutation payment), then the SMSF could make a supplementary payment to Bill’s spouse of $2,025 and the SMSF would be entitled to a tax deduction of about $13,500.

The significance of the 27% is simply that the available amount to pay the supplementary benefit was $2,025 and this amount is 27% of the full tax detriment of $7,500.

It is simply a matter of reverse engineering.  If the full tax detriment was, say, $30,000 and the available amount to make the anti-detriment payment was say $9,000 then by ensuring that 9/30ths of the death benefit is payable as a lump sum to a death benefits dependant, the fund can make a supplementary payment of $9,000 and be entitled to a tax deduction of $60,000 (ie $9,000 divided by 15%).

SUPERCentral Governing Rules were recently amended in May 2011 to expressly permit the trustees of participating funds to have the ability (subject to finance of course) to pay partial anti-detriment payments.