SMSF Alliance warns against untaxed element

An untaxed element on self-managed superannuation funds (SMSFs) would result in an additional 15 per cent tax applied to taxable death benefits, where non-tax dependants receive a lump sum payment if a deduction for life insurance premiums or future service has been taken, says David Busoli from SMSF Alliance.

Busoli said if the lump sum payment was made to tax-dependants such as a spouse, minor child or financial dependant, or if the benefit was paid as a pension, no adverse tax position arises.

There would be consequences on the inclusion of life insurance in the fund however, if the benefit was given to an adult independent child as a beneficiary.

The future liability deduction, which would allow a fund to claim an income tax deduction in the payment of a superannuation death, terminal illness, disability superannuation or temporary incapacity income stream benefit, could result in a tax saving of $87,000 if a life insurance policy funded any part of the $1 million payment to the tax-dependent.

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The untaxed element would reverse this saving, as it would reflect the additional tax payable by non-tax beneficiaries.

Busoli added while the tax saving is achieved by carrying forward the income tax deduction, the additional tax payable is due at the time of payment.

He said holding life insurance in the fund where the benefit recipients would not be tax dependants should be avoided, as this could trigger the additional tax irrespective of whether or not the future service deduction is taken.