Draft Div 296 regulations have been released for consultation, revealing two estate planning issues that advisers will need to address for clients affected by the new tax.

The first is the prospect of the final Div 296 position not being known for months or possibly years after a member dies.

The second, and potentially more concerning, is whether the eventual tax cost is borne by the intended recipient of the super death benefit or by the estate [and therefore potentially different beneficiaries].

 

1. timing risk

 

The draft regulations make it clear that a member’s Div 296 “earnings” may not stop at death.

In broad terms, earnings can continue to be attributed to the deceased member’s interest after death until the death benefit is paid, or until another person becomes entitled to a retirement phase income stream supported by that interest [e.g. a reversionary pension or another death benefit pension].

This approach is consistent with capturing earnings on the member’s interest until it is dealt with, but it creates practical timing and cashflow issues for death benefit planning and administration.

It is not uncommon for there to be a delay of months or years between a member’s death and the payment of their benefit.

Delays can arise due to liquidity constraints [property or other illiquid investments needing to be sold], delays in commutation, trustees needing to properly exercise their discretion, competing death benefit claims, or broader estate litigation.

The practical consequence is that the Div 296 earnings for the deceased member may span multiple years after death, with the executor having to delay the winding up of the estate until final assessments are issued and paid.

 

2. mismatch risk

 

There is also a separate risk which might easily be overlooked: the party who receives the super death benefit may not be the party who bears the Div 296 cost.

Because the Div 296 liability is a member [and therefore estate] liability, it does not automatically attach to the death benefit payment.

The estate bears the tax, irrespective of who receives the death benefit.

Even where the death benefit is paid to the estate, liability does not automatically “attach” to the super death benefit itself. In the absence of specific drafting in the will, the tax is a general estate expense borne by the residuary beneficiaries, even if the will directs the superannuation death benefit to be paid to another beneficiary.

If the intention is that the death benefit bears the tax, the estate documents will need to provide a clear mechanism to attach the liability to the death benefit.

This may not necessarily be achievable in every instance.

 

mismatch risk example

 

Consider this example.

George has a superannuation interest of $5m and assets outside super worth $2m.

He makes a binding death benefit nomination directing his entire super death benefit to his second wife, Mary.

His will leaves his estate to his three children from his first marriage.

While Mary receives the full super death benefit directly from the fund, George’s children, as estate beneficiaries, bear the economic cost of the tax as it is paid from the estate. This outcome may be inconsistent with George’s intentions.

Even if George instead directs the death benefit to be paid to his estate, and includes a provision for Mary to receive the death benefit, careful drafting will still be required if George wants the Div 296 tax liability to be borne by Mary.

Without clear directions, George’s children as residuary beneficiaries will still end up bearing the Div 296 tax cost.

 

For advisers, the key is to identify both the timing risk [post-death earnings attribution continuing until the interest is dealt with] and the mismatch risk [who receives the super vs who funds the tax].

These issues need to be considered early so the client’s intended beneficiaries are not surprised by an unintended Div 296 outcome post-death.

 

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If you have any questions you can send them through to legal@businessdepot.com.au, or feel free to give us a buzz on 1300BDEPOT.

 

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