Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon Scott Morrison MP and Minister for Revenue and Financial Services, the Hon Kelly O'Dwyer MP)Chapter 11 - Anti-detriment provisions
Outline of chapter
11.1 Schedule 9 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the TLA Bill) removes the income tax deduction available to a complying superannuation fund, life insurer, or complying approved deposit fund that pays an increased superannuation lump sum, because of the death of a member for the benefit of their spouse, former spouse or child, to compensate for income tax paid by the fund in respect of contributions made for the member during their lifetime.
11.2 All legislative references in this Chapter are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise specified. All legislative amendments referred to in this Chapter are contained in the TLA Bill.
Context of amendments
11.3 The measure forms part of the Government's Superannuation Reform Package announced in the 2016-17 Budget. The measure improves the integrity and fairness of the superannuation system.
11.4 Following the death of a member of a superannuation fund or approved deposit fund, a payment can be made to a beneficiary or to the trustee of a deceased estate. The payment can be made as a superannuation lump sum, or to dependants of the member, as a superannuation income stream.
11.5 Currently the deduction under section 295-485 (the anti-detriment deduction) generally entitles complying superannuation funds and complying approved deposit funds to an income tax deduction when they provide a lump sum benefit because of the death of a member for the benefit of their spouse, former spouse or children. The amount a fund may deduct is broadly:
- •
- the amount by which the benefit is greater than it would otherwise be to compensate for the income tax that was payable on the member's contributions;
- •
- divided by the income tax rate that applies to assessable contributions to the fund (that is the amount of tax the fund is expected to have borne in relation to the contributions).
11.6 An equivalent deduction is available in the same circumstances for lump sum death benefits paid by life insurers in respect of exempt life insurance policies (within the meaning of section 320-246) and certain other life insurance policies relating to superannuation (see section 320-107).
11.7 The anti-detriment provision is inconsistently applied by funds and insurers. While the concession is intended to benefit certain dependants of deceased members, it relies upon the actions of funds and insurers. This is because not all funds and insurers are willing or able to increase benefits payable because of death.
11.8 The deduction was originally introduced to smooth the transition when superannuation contributions became subject to income tax in the hands of superannuation funds by ensuring that recipients of benefits paid in respect of a member's death were not disadvantaged. The transitional measures are no longer warranted and are inconsistent. Removing the anti-detriment income tax deduction better aligns the treatment of lump sum benefits paid in respect of the death of members across all complying superannuation and approved deposit funds, as well as life insurers, and the treatment of bequests outside of the superannuation system. The taxation treatment in the hands of recipients of lump sum benefits paid in respect of the death of a member is not changed.
Summary of new law
11.9 The amendments remove the anti-detriment deduction from the income tax law.
Comparison of key features of new law and current law
| New law | Current law |
| Complying superannuation funds and complying approved deposit funds are not entitled to claim an income tax deduction if they pay a superannuation benefit on the death of a member to benefit their spouse, former spouse or children and this benefit is greater than it would otherwise be to compensate for income tax paid by the fund in respect of contributions made during the member's lifetime.
The equivalent deduction for life insurers is also no longer available. |
Complying superannuation funds and complying approved deposit funds are entitled to claim an income tax deduction if they pay a superannuation benefit on the death of a member to benefit their spouse, former spouse or child and this benefit is greater than it would otherwise be to compensate for income tax paid by the fund in respect of contributions made during the member's lifetime.
An equivalent deduction is available for lump sum death benefits paid by life insurers in respect of exempt life insurance policies (within the meaning of section 320-246) and certain other life insurance policies relating to superannuation (see section 320-107). |
Detailed explanation of new law
11.10 The amendments repeal section 295-485 (the anti-detriment deduction). This section allowed complying superannuation and approved deposit funds an income tax deduction if a lump sum superannuation benefit paid to benefit the spouse, former spouse or children of a member following a member's death was greater than it would otherwise have been to compensate for tax payable on the contributions to the fund made for the member over the member's lifetime. [Schedule 9, item 3, section 295-485]
11.11 The amendments also repeal section 320-107 which provided an equivalent deduction to life insurers under the same circumstances. [Schedule 9, item 3, section 320-107]
11.12 Removing the anti-detriment income tax deduction better aligns the treatment of lump sum benefits paid in respect of the death of members across all complying superannuation funds, life insurers and approved deposit funds and the treatment of bequests outside of the superannuation system. The taxation treatment in the hands of recipients of lump sum benefits paid in respect of the death of a member is not changed.
Example 11.1 : No entitlement to deduction
John is a superannuation fund member who passes away in February 2018. John has two children, Miranda and Sam. John's superannuation fund pays Miranda and Sam a superannuation lump sum death benefit. Although Sam and Miranda are John's children, because of these amendments the superannuation fund is not entitled to claim an income tax deduction for any increase in the amount of these payments to compensate for the income tax paid on contributions made in respect of John's superannuation interest with the fund.
Consequential amendments
11.13 Schedule 9 to the TLA Bill makes a number of consequential amendments to income tax law (including the transitional provisions) to remove items that become redundant following the repeal of the deduction. [Schedule 9, items 1, 2 and 4, table item headed "superannuation and related business" in the table in section 12-5 and group heading before section 295-485 of the ITAA 1997 and sections 295-485A and 295-485 of the Income Tax (Transitional Provisions) Act 1997]
Application and transitional provisions
11.14 The amendments in Schedule 9 to the TLA Bill commence on the start of the first day of the first quarter following Royal Assent. [Item 4 of the table in subsection 2(1) of the TLA Bill]
11.15 The repeal applies in relation to lump sums that are paid because of the death of a member where that member died on or after 1 July 2017. However, from 1 July 2019, it applies to all benefits paid after this time, irrespective of whether the member died before 1 July 2017. [Schedule 9, item 5]
11.16 This ensures that delays in the payment of a lump sum in respect of the death of a member in the first two years after the repeal do not result in differences in income tax treatment. However, limiting the transition period to two years avoids uncertainty and compliance costs that would result from indefinitely retaining the income tax deduction in respect of members that pass away prior to 1 July 2017 where payment of lump sums to beneficiaries is significantly delayed.
Example 11.2 : Entitlement to income tax deduction
Susan is a complying superannuation fund member who passes away on 30 June 2017 and is survived by her husband, William. In December 2017, Susan's superannuation fund pays William a lump sum death benefit, representing the value of Susan's interest and an amount equal to the estimated income tax that has been paid in respect of the superannuation contributions made during Susan's lifetime. The superannuation fund is entitled to claim an income tax deduction under section 295-485 (the anti-detriment deduction) in respect of the payment, as Susan passed away before 1 July 2017.
Example 11.3 : No entitlement to income tax deduction
Reuben is a complying superannuation fund member who passes away on 15 July 2017 and is survived by his adult son Alexander. Reuben's superannuation fund pays Alexander a lump sum death benefit. The superannuation fund is not entitled to claim an income tax deduction for any increase in the amount of this payment to compensate for the tax paid in respect of contributions to Reuben's superannuation interest with the fund because Reuben passed away after 30 June 2017.
Example 11.4 : No entitlement to income tax deduction for payment made after 1 July 2019
George is a complying superannuation fund member who passes away on 15 June 2017 and is survived by his adult son Tim. George's superannuation fund pays Tim a lump sum death benefit. Due to delays in the grant of probate this payment is not made until 29 August 2019. The superannuation fund is not entitled to claim an income tax deduction because, although George passed away before 30 June 2017, the payment was not made until after 1 July 2019.
STATEMENT OF COMPATABILITY WITH HUMAN RIGHTS
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016
11.17 Schedule 9 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .
Overview
11.18 Schedule 9 to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 removes the income tax deduction available to a complying superannuation fund, life insurer or complying approved deposit fund that pays an increased lump sum, because of the death of a member for the benefit of their spouse, former spouse or child, to compensate for income tax paid by the fund in respect of contributions made for the member during their lifetime.
11.19 Removing the anti-detriment income tax deduction better aligns the treatment of lump sum benefits paid in respect of the death of members across all complying superannuation funds, life insurers and approved deposit funds and the treatment of bequests outside of the superannuation system. The taxation treatment in the hands of recipients of lump sum benefits paid in respect of the death of a member is not changed.
11.20 The anti-detriment provision is an outdated provision that was introduced in 1989, when superannuation was taxed very differently. The provision is inequitable because it is provided inconsistently across superannuation funds. The removal of this provision aligns the treatment of superannuation death benefits with the tax treatment of other bequests for which no tax deduction is given for prior tax paid.
Human rights implications
11.21 This Schedule does not engage any of the applicable rights or freedoms as it removes an anomaly in the current tax treatment of these amounts.
Conclusion
11.22 This Schedule is compatible with human rights as it does not raise any human rights issues.