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Unpaid Present Entitlements

A draft ruling was issued in December 2009 by the Commissioner of Taxation dealing specifically with unpaid present entitlements to companies. The ruling seeks to apply the existing Division 7A rules to amounts of income distributed by trusts to Corporate Beneficiaries that are not subsequently paid. In effect, any amounts not paid to the Company and not subject to a loan agreement meeting the requirements of Division 7A, would be treated as a deemed dividend.

This draft ruling is open for comment from interested parties until February of this year. As the ruling represents a significant change in the way in which these rules are applied in practice the industry bodies are to submit a combined response to the ruling. Once a final ruling has been issued, we will advise further on the impact this may have on your existing circumstances. In the meantime, it is relevant to consider alternative taxation strategies for the 2010 and future years where a Corporate beneficiary has been utilised in the past if the Trust does not have sufficient income to make the required repayments or to transfer the entitlements in full.

Recontribution vs. Anti-Detriment

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With the government implementing Simple Super legislation on 1 July 2007, many strategies have been compiled regarding recontributing into your superannuation fund with the result of avoiding the 16.5% tax on death benefits. However this may not always be beneficial as paying no tax may result in no anti-detriment payment being received.

The recontribution strategies involve a member of a superannuation fund withdrawing a lump-sum, paying any benefits tax, and then recontributing the amount back into the fund. The result of this process increases a member’s tax free portion of their benefit and reduces the taxable portion. The advantages of this include:

- Members under age 60 become eligible for an increased tax free portion on their pension;
- Non-tax dependent beneficiaries of a deceased’s member account proceeds pay no tax on the tax free portion but 15% plus Medicare on the balance.

There are also considerations that must be taken into account before choosing such a strategy, such as:

- by withdrawing lump sum benefits from super below the age of 60, you will only be able to receive the first $145,000 of your taxable portion at a concessional tax rate;
- Your ability to recontribute is restricted. For the 2009/10 financial year, you may contribute up to an annual cap of $150,000. For members under 65, they may contribute up to $450,000 in a financial year by bringing forward up to 2 years entitlements.

An anti-detriment payment is effectively a refund of contributions tax paid by a member during the accumulation phase. It is an additional payment that may be made to an eligible dependant if a death benefit is taken as a lump sum. The anti-detriment payment is calculated based on the taxable portion of a deceased members balance so a reduction in the taxable component through a recontribution strategy will effectively reduce any anti-detriment payment available. The effect of either strategy can be seen below.

Example: Assume a member’s superannuation benefit payable upon their death was $500,000 and if an anti-detriment payment was available they would receive an additional $80,400.

Effect of implementing a recontribution strategy on death benefits paid to tax non-dependants (eg. adult children):

	Recontribution strategy NOT implemented	Recontribution strategy implemented
Taxable Component	$500,000	NIL
Tax-free Component	NIL	$500,000
Anti-detriment payment	$80,400	NIL
Tax paid by non-dependant	$95,766	NIL
Total Benefit	$484,634	$500,000

Effect of implementing a recontribution strategy on death benefits paid to tax dependants (eg. spouses and young children):

	Recontribution strategy NOT implemented	Recontribution strategy implemented
Taxable Component	$500,000	NIL
Tax-free Component	NIL	$500,000
Anti-detriment payment	$80,400	NIL
Tax paid by non-dependant	NIL	NIL
Total Benefit	$580,400	$500,000

Generally, the recontribution strategy is worth considering if the benefit is likely to be paid to a non-dependent for tax purposes, such as an adult child. This is because the tax savings generally outweigh any potential anti-detriment payment they would otherwise receive. If the death benefit is being paid to dependants, it would be wise to consider any potential anti-detriment paymen2ts before implementing a Recontribution Strategy.

The result of paying an anti-detriment can also lead to future tax consequences for the fund itself and for future members. When an anti-detriment payment is made, the superannuation fund receives a deduction based on the detriment amount. Using our example from above, if the anti-detriment payment was made of $80,400 the superannuation fund would receive a deduction for this amount of $536,000 ($80,400 ÷ 15%). The anti-detriment deduction is only allowed where a dependant is entitled to receive a lump sum benefit. The deduction is of advantage to the fund in the future and to its future members as it can be used to offset future contributions tax and earnings.

If you believe that setting up a recontribution and/or an anti-detriment strategy could be beneficial to your superannuation fund and to the beneficiaries of your benefits than now is the time to plan for this and put in place the structures and strategies. Contact one of our professional staff members and plan for the future today.

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The contents of this Bulletin are general in nature. We therefore accept no responsibility to persons acting on the information herein without first consulting us.