Buried deep in the Government's Mid-Year Budget and Fiscal Outlook papers there is an announcement that will bring a major smile to the faces of SMSF trustees. Until now, in the absence of an eligible reversionary pension beneficiary, pensions ceased on the death of the member. The subsequent sale of Fund assets to pay out the requisite lump sum benefit then occurred in the accumulation stage resulting in a net 10% capital gains tax bill based on the original purchase price of the asset. Some Funds in the past have suffered substantial tax much to the chagrin of the lump sum beneficiaries.

The Government announced that it will now amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. This change will have effect from 1 July 2012.

The superannuation law requires the benefits of a deceased member to be paid out of the fund as soon as practicable following the member’s death. The continuation of the earnings tax exemption beyond the death of a member will be subject to this existing requirement.

This change will benefit the beneficiaries of deceased estates by allowing superannuation fund trustees to dispose of pension assets on a tax-free basis to fund the payment of death benefits.