Keeping track of contributions tax

What is an anti-detriment payment?

An anti-detriment payment is a lump sum amount that is paid in addition to the account balance of the deceased member. Technically speaking, it is not a separate payment in its own right. Rather, the anti-detriment amount will form part of the overall death benefit payment.

The anti-detriment payment is restricted to death benefits made in lump sum form. The payment represents a refund of contributions tax levied against the deceased member’s superannuation entitlements during their lifetime.

Why was the anti-detriment payment introduced?

The 15 per cent contributions tax came into effect on July 1, 1988, following a commitment by the then Federal Treasurer, Paul Keating, not to introduce any new taxes during that term of government.

It was argued that the contributions tax was not a new tax but rather a ‘bring forward’ of lump sum payment taxes, which had been simultaneously reduced by the equivalent 15 per cent.

However, this argument could not hold true for lump sum death benefits made to a qualifying dependant, as these payments were not subject to tax prior to July 1, 1988. In effect, the introduction of the 15 per cent contributions tax would be detrimental to qualifying dependants in the absence of adequate compensation (via the anti-detriment payment).

Who qualifies?

Qualification is limited to lump sum death benefits paid in favour of a spouse, ex-spouse or child (including adult child) of the deceased member. This includes payments that are made via the deceased’s estate to the extent these dependants will benefit.

While an adult child is not ordinarily classed as a dependant for death benefit tax purposes, it appears an oversight in the original drafting of the anti-detriment provisions has led to the favourable inclusion of adult children.

Do all superannuation funds offer anti-detriment payments?

Some superannuation funds will pay anti-detriment amounts and others will not. It is advisable to consult the superannuation fund in question to determine the trustee’s anti-detriment policy.

For lump sum death benefits payable to the deceased’s estate, it is prudent to inform the trustee of the extent to which a qualifying dependant will benefit from the death benefit.

Without this knowledge, the trustee cannot determine qualification for the anti-detriment payment.

How is the anti-detriment payment calculated?

The anti-detriment payment cannot exceed the actual contributions taxes levied against the deceased member’s account if the trustee is able to quantify these.

In many situations, trustees are unable to track total contributions taxes paid, particularly where benefits have been transferred from previously held superannuation funds. ATO ID 2007/219 outlines a formula to help trustees determine contributions taxes levied.

The formula only provides a notional calculation and is intended for accumulation funds that are unable to determine the actual contributions taxes paid.

According to the formula, the anti-detriment amount will be calculated as below.

The Australian Taxation Office’s (ATO) formula approach is heavily dependent on the deceased’s service period start date and in some cases the member’s date of death.

According to the ATO formula, the best possible outcome is delivered for service periods commencing on or after July 1, 1988. In this case, the ATO formula yields and anti-detriment payment approximately equal to 17.647 per cent of ‘C’ (the lump sum’s taxable component excluding insurance proceeds from death cover).

For all service periods dated before July 1, 1983, the actual service period start date would not alter the anti-detriment payment. Rather, it is the member’s date of death that will dictate the percentage outcome, with later deaths resulting in a higher anti-detriment payment.

For service periods between July 1, 1983, and June 30, 1988, (inclusive), the anti-detriment payment is a function of the member’s date of death and the actual service period start date.

As a general rule of thumb, a higher anti-detriment payment will result for later service period start dates and dates of death.

A superannuation fund trustee is able to adopt its own actuarially-backed formula subject to the Tax Commissioner’s prior approval.

How will the anti-detriment payment be taxed?

A lump sum death benefit will be broken up into its tax components: tax free and taxable. The anti-detriment payment will always form part of the lump sum’s taxable component.

A spouse, ex-spouse, child under age 18 and a financially dependent child of the deceased will not be taxed upon receipt of lump sum death benefits.

Given the anti-detriment payment forms part of the lump sum death benefit, this too will be tax-free for these dependants.

On the other hand, an adult child who was not financially dependent on the deceased will be taxed on the lump sum death benefit’s taxable component.

This tax is usually capped at 15 per cent; however, in some cases tax can be as high as 30 per cent (that is, on the untaxed element of the taxable component where the lump sum death benefit includes insurance proceeds from death cover).

In addition, the Medicare Levy will generally apply unless the payment is made via the deceased’s estate.

Rudy Haddad is the technical services manager at INGAustralia .