ATO Rulings – Capital Gains, Income Tax
and Tax Return upon death
Current ATO rulings applied to Spouse and Children
According to the Australian Taxation Office (ATO), if estate planning is not arranged properly, spouses and children could be charged six-figure tax bills on the death of a parent or partner. The extra taxes will accrue in addition to the existing 16.5% death benefits tax and applicable for adult child beneficiaries. The ATO also says that private pensions are not tax-free once the pensioner dies so beneficiaries will have to pay capital gains (CGT) and income tax on the deceased person’s assets.
Pension Assets and CGT
The CGT could be very large in cases where a fund had owned property or shares for several years due to the strong performance of the property market across recent years. If the assets were held for a long period, taxes could go up to tens or hundreds of thousands of dollars. The deceased pensioner’s savings are no longer allowed to be left in the pension phase until all assets are sold or transferred because even if the beneficiaries do that, they would still be subject to CGT or income tax eventually.
Self Managed Super Funds (SMSF)
This is not particularly good news for SMSFs because these type of balances are often higher and DIY funds have to dispose of the assets to pay benefits. Large pooled funds might not need to sell off the assets to pay death benefits so these won’t be subject to CGT.
Plenty of fund members believe that their assets will be passed on without income tax and CGT when they die but according to the ATO, a superannuation income stream ceases when there is no longer a member who is entitled automatically or a dependent beneficiary of a member who is automatically entitled to be paid a super income benefit.
Disposal of Assets
The sale of assets to pay death benefits is subject to 10% CGT while dividend income or interest earnings which flow into the fund are subject to a 15% income tax immediately upon the member’s death. Adult children will be subject to a 16.5% death levy and those with no spouse or dependent child are exposed to additional taxes.
Pension vs Lump Sum Payments
A spouse or dependent child may avoid taxes if the super fund trust deed states that when a member dies, the assets can be distributed in the form of a pension instead of a lump sum payment. In this case, there is no CGT because no assets would be sold to fund pension payments.
However, if the trust deed does not make a provision for pension payments, the assets which are attributed to the deceased member have to be taken out of the pension, as determined by an actuary.
Pension Re-Contribution Rules
The surviving spouse may recontribute the assets into another pension but subject to strict contribution caps. One over 65 years old won’t be allowed to contribute the money if they fail the work test, which means they have to be gainfully employed for at least 40 hours in no more than 30 consecutive days in the tax year in which the contribution is made.
Estate planning arrangements can be pretty confusing to couples e.g. those who want to avoid paying CGT or Earnings Tax on their assets and are forced to pay their death benefits as a pension instead of a lump sum to the estate. (This may not be good news to those who don’t want their spouse to completely control their assets.)
Fund members should also make sure that when their funds are moved into the pension phase, the trust deed was amended to make provision for a pension to be paid to a spouse or dependent child and allow a reversionary pension nomination.
Despite the current ATO ruling, many estates are being managed under different rules and industry advisers often argue that pensions should be tax-free even after a member dies. According to current Superannuation rules, death benefits must be paid as soon as practical (but there is no strict deadline).
In many instances, the executor of the estate may need to lodge a final tax return for the deceased person.
If you would like to know more about Income Tax and Deceased Tax Returns, you can click here to find out more about Chan & Naylor services. You can contact us directly or online by leaving your details on our page, we can even schedule a no-obligation consultation at your convenience if desired.
Dealing with the loss of a loved one can be overwhelming and a good place to seek help is through your accountant, who can also refer you to other professionals if needed. Aside from estate planning, some of the areas you may need help with include superannuation, taxation, property investment, asset protection and more.
We hope that we have given you some helpful advice on current ATO rulings regarding Spouse or children.
Any comments and questions are welcome.