Anti-Detriment Payment – Save Tax on death 4 yr spouse!

1. What is the benefit of this Anti Detriment payment?
2. How is the Anti Detriment Payment Calculated?
3. Advantages of Anti Detriment Payment
4. Disadvantages of Anti Detriment Payment
5. Using a Reserve to fund Anti Detriment Payment
6. Life Insurance & FITB to fund Anti Detriment Payment
7. Re-contribution strategy and Audit Method
8. Anti Detriment Checklist

In fact the tax savings can flow to the surviving spouse or children. An Anti-detriment payment is a payment from your SMSF to the deceased member in addition to the <Lump Sum death benefit payment>  made from the deceased members SMSF account balance. A death benefit payment paid as a pension will not qualify and therefore prevent a anti detriment payment.

What is the benefit of this Anti Detriment payment?

The Benefit of this payment is that it becomes a tax deduction to the SMSF at the time it is paid. To illustrate how good this can be let’s say Alan who was born on 1.11.56 dies at 64 on 1.11.2011 with a member balance of $400,000 (comprising concessional contributions and investment earnings). Alan joined the SMSF on 1 Sep1994. The SMSF can pay a Anti Detriment payment to the deceased’s estate/nominated beneficiary of $70,588. Even better the SMSF can claim a tax deduction for $470,588, (calculated as $70,588/.15). That’s a tax benefit of $70,588 in future tax savings based on a 15% tax rate.

How is the Anti Detriment Payment Calculated?

The Anti Detriment can be calculate in a number of ways, in the above example the <ATO ID 2007/219> (1) Alternative Method was chosen. Other methods include (2) Audit Method (actual amounts of contributions paid), (3) EM Method and (4) the SMSF’s Auditor Method, which has no guidance issued in respect to this method. The ATO ID method is the most common given the guidance of the ID.

Advantages of Anti Detriment Payment

• significant tax deduction that can be claimed by the SMSF
• tax savings to surviving spouse
• tax savings to children
• eliminate any capital gains tax on asset sales of the member to fund the death benefit payment.
• combining re-contribution with anti detriment using Audit Method.

Disadvantages of Anti Detriment Payment

• Cannot fund the Anti Detriment Payment form the deceased members balance
• Need to have a strategy to allocate funds to a reserve over a long period of time to fund the anti-detriment payment, with the exception of the Life Insurance or FITB approach.
• Payments to the member from the reserve count towards the members concessional contribution cap, therefore in the above example excess contributions tax would apply to the amount over and above $50,000.
• Where the SMSF is in pension phase, the earnings on the reserve do not receive the pension exemption and are taxed at 15%.

Using a Reserve to fund Anti Detriment Payment

A Reserve is a specific account setup in the SMSF that does not form part of the members account balance. For example lets say that the earnings of the fund is $30,000, if the trustee allocates $25,000 to the members accounts and $5,000 to the Anti Detriment reserve, trust deed permitting, and continues to do this each year for 15 years, then the reserve would be big enough to pay the anti detriment payment to Alan in the above example.

Life Insurance & FITB to fund Anti Detriment Payment

If the deceased has a Life Insurance Policy with the beneficiary as the SMSF, the proceeds can be allocated to a reserve for purposes of a paying a anti detriment payment. While this avoids the need to create a reserve, you need to factor in the cost of the Life Insurance Premiums.

The FITB method basically uses the Tax Benefit of the anti detriment payment to create an asset called FITB (Future income tax benefit). This asset is used to fund the anti detriment payment, provided there are sufficient cash funds available to make the payment. In the above example the FITB would be approx $70,588.

Proper documentation is required to establish that member balances are being preserved and not forfeited.

Re-contribution strategy and Audit Method

As the Anti Detriment payment is based on the taxable component, reducing the taxable component using the <re contribution strategy> reduces the amount of the anti detriment payment. However if the Anti Detriment payment is calculated using the Audit Method, then the Anti Detriment payment is not reduced as it uses the amount of what ‘could’ have been paid had tax not been paid (including amounts subsequently withdrawn as in the case of a re contribution strategy).

Anti Detriment Checklist

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