Avoiding A Big Tax Bill When An SMSF Pension Stops
The headline on the front page of the AFR today was “ATO Ruling Confirms Tax Liability After Death” and the article pointed out that SMSFs would be hit the hardest with tax bills because of the ATO view.
The ATO has released a draft tax ruling which outlines their view of what happens from a income and capital gains perspective when a pension payable from a fund ceases to be payable.
But rather than being a new and controversial view the ATO is simply confirming what many practitioners in this area have understood to be the case. On the death of an SMSF pensioner, the pension ceases, and unless there is someone else automatically entitled to receive the pension, the income tax exemption for pension funds ceases.
The main impact of this can be the effective re-introduction of capital gains tax, and sometimes the potential tax bill can be many tens of thousands of dollars.
So can you do anything to avoid this tax?
The answer is yes and involves making sure that SMSF beneficiary nominations are correctly designed to meet the ATO requirements, making sure that SMSF trustees apply careful tax management annually and planning pension payments properly.