SMSF death beneficiaries and exceeding the $1.6m TBC

 

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Topics include tax, super and SMSFs. Of the latter, one such query and answer had to do with a couple with an SMSF where, should one of them lose the other and become a beneficiary of the will, the surviving spouse may end up with a balance over the $1.6 million cap.

The ATO answer may be instructive for others in a similar situation.

The inquirer asks: “My wife and I have around $800,000 in super each in our SMSF. If one of us died and the super was transferred to the other, the super held could exceed the $1.6m cap. Just wondering (about) the tax implications?”

The answer that the ATO operative gave follows:

“I’ll assume you’re referring to the $1.6m transfer balance cap (TBC) — there’s also a $1.6m total super balance test for determining whether someone is able to continue to make personal (non-concessional) contributions to super.

“When a super fund member dies, a death benefit must be paid. It’s not possible to simply transfer the account balance to another member of the fund. So either a lump sum needs to be paid or possibly a reversionary pension if the fund rules allow this and a dependant beneficiary exists at the time.

“If a reversionary pension starts being paid the value of the pension account is counted towards the beneficiary’s transfer balance cap. It then depends on the beneficiary’s existing transfer balance account status.

“Let’s say you’ve already started receiving a pension from your own account and have used up $900,000 of the $1.6m TBC. The value of the reversionary pension account is then a further $800,000. This would take you to $1.7m — $100,000 over the cap.

“Ideally you’d realise that this would be the outcome and only take a reversionary pension with $700,000 of the $800,000 balance and pay the remaining $100,000 out of the fund as a lump sum payment. (Or alternatively you could commute $100,000 of your existing pension account back to an accumulation phase account to create the additional cap space you need, allowing you to retain all of the money in the super fund.) You’d then have used up your $1.6m cap space and there’d be no additional tax consequences.

“If you weren’t aware of this at the time and started receiving a reversionary pension with the full $800,000, you will exceed your TBC. The ATO would send your fund a commutation authority requiring the excess $100,000 to be removed from the pension phase. You’d then pay a 15% tax on an earnings amount calculated by the ATO for the time the excess amount was in pension phase.”

This ato.gov.au page has a lot of information about the TBC. And this page covers the death benefit income streams and the transfer balance cap.