Preparing the accounts of an SMSF after a pensioner’s death—when their pension didn’t continue - can be tricky. Super and tax rules don’t always align, leading to different outcomes. The key? Ensuring the pension account remains intact. Let’s break it down.
For superannuation purposes, an account-based pension that doesn’t automatically continue to another person stops when the original pensioner dies. At this point, the trustee is no longer required to make pension payments – so it’s important to check that any direct debits are cancelled. Additionally, in the financial year of the pensioner’s death, there is no requirement for the member to have received any pension payments – either before passing or after.
Given this, it might seem logical when preparing the fund’s accounts to “turn off” the pension account at date of death and roll the remaining balance back into the deceased member’s accumulation account. Right? No, that would be a mistake!
Why should the pension account remain intact?
Two reasons.
From a tax perspective, the pension remains a separate superannuation interest. This means it should not be combined with the deceased member’s accumulation or other pension accounts. A pension that consists predominantly of tax-free component, will continue to have this proportion after the death of the pensioner.
Keeping the pension account intact also ensures the fund’s tax liability will not be overstated.
Here’s why: the former pension account will continue to attract exempt current pension income (ECPI) on earnings attributable to it until the death benefit is cashed. The only exception is if insurance proceeds are allocated to the former pension account balance – this money won’t attract ECPI.
How long does this tax treatment apply?
The tax treatment continues until the death benefits are fully cashed. However, remember, the superannuation law requires trustees to cash death benefits as soon as practicable.
So, how long is an acceptable delay? Well, that depends! Join us for our Death Benefit Masterclass on 20 March 2025 where we will answer this question and many more as we walk through the issues to be addressed when a client dies with money in superannuation.