Anti-Detriment Payments

What is Anti-Detriment?

When contributions tax was originally introduced, concerns were raised that the tax was effectively a death tax, as super is for the benefit of the member or their dependants on death. To ensure this was not the case, anti-detriment payments were created.

Now in the event of a member’s death, the dependants may be entitled to an additional payment from the superannuation fund as compensation for the tax paid by the member on their contributions along the way.

It’s purpose is to ensure a dependant can be paid a death benefit of a value equal to what would have accumulated, had contributions tax not been introduced. For example; if Bob pays $5,000 in “contributions tax” each year for 5 years before his death, his spouse would in theory be short by $25,000 plus the earnings that would have accrued over the 5 years.

How does it work?

To reverse the effect of the contributions tax that has been taken out over the years, an anti-detriment amount is calculated. In the above example if total earnings over the 5 years were $7,000 the antidetriment amount would be $32,000.

Then the death benefit must be physically paid out as a lump sum to the member’s dependants, which include the member’s spouse or a child of the deceased (including adult children). In addition to the death benefit, the Trustee must also pay out the anti-detriment amount, which needs to be funded by reserves or available cash within the fund.

After the amount is paid, the fund is entitled to claim a tax deduction for an amount that will result in a tax saving equal to the anti-detriment amount. If the tax deduction amount is more than the fund’s income for the year a tax loss will occur, which will be carried forward to future years. So in the above example the fund needs to recoup the $32,000 paid to dependants by claiming a tax deduction for $213,333.

How is it calculated?

The actual calculation is not simple and in practice there are two methods available to calculate the amount correctly.

Method 1 – Contributions Method - Under this method the Trustee needs to calculate the actual amount of benefit which would have been payable and compare it to what is payable. The difference is the anti-detriment amount. Some Trustees set up a reserve to assist with this process and they put an amount equal to the contributions tax each year to that reserve. When the profit is allocated each year the same percentage of profit is also allocated to the reserve. So the balance of the reserve will be the antidetriment amount.

Method 2 – Formula Method - This method is used when the information to calculate the actual amount as above is not available. Using a formula the taxed component of the deceased’s death benefit, excluding any insurance proceeds, is calculated with reference to the member’s membership and employment period.

Is this beneficial for all funds?

This generalised strategy is not appropriate for all funds and in particular it should not be used in the following situations:

  1. The fund trust deed does not allow this type of payment
  2. If the death benefit is to be paid as a pension
  3. If the deceased has a reversionary pension
  4. If the fund is a single member fund with no reserves
  5. If the fund will not have assessable income in future years to make use of the deduction
  6. If the fund will be wound up after the death benefit payment

So what are the benefits, when it is appropriate?

The benefit of using anti-detriment when it is appropriate includes the dependants receiving a larger death benefit than would otherwise be available. The additional benefit is funded by the ATO, who allows the fund to claim a tax deduction which results in continuing members paying less tax and so clawing back the cash paid out of the fund.

Anti-Detriment Example:

At 30 June 2011 Bob and Bertha’s SMSF has cash of $290,000 and listed shares of $85,000. Bob’s balance in the fund is $250,000 and Bertha has a balance of $125,000,

Bob dies on 1 July 2011 and his benefit is to be paid to his dependant spouse as a lump sum. The Trustee calculates the anti-detriment amount to be $32,000. The payment to Bob’s wife is $282,000, which is his account balance of $250,000 plus the anti-detriment of $32,000.

After the payment the fund has assets of listed shares of $85,000, cash of $8,000 and a future income tax benefit of $32,000, supporting Bertha’s balance of $125,000.

For the year ending 30 June 2012 the fund will claim a tax deduction of $213,333, which will recoup the $32,000 future income tax benefit. This will result in the fund’s cash being increased by $32,000, as less tax is payable, which effectively recoups the money for the remaining member.

WE STRONGLY RECOMMEND ADVICE BE OBTAINED BEFORE IMPLEMENTING ANTI-DETRIMENT PAYMENTS

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