I hit a real low when I hear a client is Permanently Disabled or Terminally ill and I am sure that is the same with most of you too but in our field of work it is a matter of when not if we have to deal with such a situation. My reaction is to always want to make the best of the situation from my point of view and add as much benefit and make life as good for that client as possible.

I have always looked at the anti-detriment deduction (no longer available for deaths after 30 June 2017) and wished there was something I could do for the client while living as well as helping their family afterwards.   

Well I would like to thank David Busoli from SMSF Alliance  for pointing me in the right direction as there is an alternative way for an SMSF to obtain a large tax deduction following the death/disability of a member.

The sources of guidance for this strategy are:

• section 295-470 of the Income Tax Assessment Act 1997 (ITAA97) “Complying funds deduction for future liability to pay benefits”; and

• section 295-485 “Deductions for increased amount of superannuation lump sum death benefit”.

 This alternative Section 295-470 tax deduction is available to an SMSF and allows the fund  to claim a deduction on payment of:

 a) a superannuation death benefit; or

 b) a disability superannuation benefit.

 This tax deduction has a number of advantages over the now removed anti-detriment deduction including the fact that it:

•  is available following incapacity i.e. not just on death;
•  does not require an additional payment to be made upon death/disability; and
•  can also be claimed where the benefit is paid as an income stream (i.e. not restricted to lump sum benefits).

The Fund does need to hold an insurance policy to be entitled to claim a deduction for future liability. (previously a policy was not always required as an insurance reserve could be used but that is no longer possible and now a policy is required – thanks again to David for giving me the heads up on this change).

These deductions can only be claimed if the trustee elects not to claim a tax deduction for the insurance premiums in the current and future financial years. Now depending on the fund’s actual circumstances and the amount of the tax deduction, this may not be a problem.

This alternative tax deduction is calculated in accordance with the following formula and can be quite large, potentially resulting in surviving/future members not paying any tax on fund earnings for some years:

 Benefit amount X Future service days / Total service days

 Example:

Marie has been a member of her SMSF for 15 years when she is disabled in an accident at age 50.

Accumulated balance: $750,000

TPD Insurance cover: $1.0 million

Total benefit paid out: $1.75 Million

Marie’s fund makes the necessary election not to claim a tax deduction for insurance premiums in the year of her disability claim. Instead, the trustees will claim a tax deduction as follows:

 $1,750,000 X 15 years future service /30 years total service = $850,000

This tax deduction of $850,000 is likely to create a tax loss for Marie’s fund. As this loss can be carried forward and used in future tax years, she and other members stand to enjoy the benefits of their SMSF not paying tax on future assessable income. To be really effective the funds needs to have members in the accumulation phase going forward which might prompt the mum and dad funds to bring in their children as the parents move into pension phase.

It is important to note that the SMSF trustee will not be able to claim tax deductions for insurance premiums on the life of any members in future years.

Not something you will come across everyday so just park this in your strategies folder for that day that will inevitably come and is a strategy that is unlikely to be used by retail or industry super funds.

I hope this is a useful strategy for you or your clients. Would love some feedback.

I hope this guidance has been helpful and please comment below. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want additional information on switching fund structures.We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Tel: 02　98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.