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Taxation of rolled over life insurance proceeds and post 30 June 2017 commutation of capped defined benefit income streams - corrective legislation introduced


Draft legislation has been released to correct, amongst other things, two unintended drafting errors arising from the “Fair and Sustainable” Superannuation changes of 2017.  The draft legislation is contained in the “Treasury Laws Amendment (Miscellaneous Amendments) Bill 2019”.  The draft legislation has been released for comments with a close off date of 27 March 2019.  Clearly the Government is intending to enact this legislation before the May Election.  If enacted the legislation applies retrospectively to 1 July 2017.

The first error relates to life insurance proceeds which form part of a death benefit paid from a superannuation fund.   As the taxation legislation currently stands, on the rollover of a death benefit to another super fund where the death benefit includes life insurance proceeds, the proceeds will generally be treated as an untaxed element and subject to 15% tax by the receiving super fund.  The draft legislation will ensure that the life insurance proceeds do not form part of the untaxed element.  Consequently on a rollover of the death benefit, the receiving fund will not impose 15% on the proceeds.  Life insurance proceeds are treated as forming part of the untaxed element if a deduction has been claimed by the fund for the insurance premium.  If enacted this change will apply retrospectively to 1 July 2017.

The second error relates to the commutation of capped defined benefit income streams (eg market linked pensions which commenced before 1 July 2017 and which were in payment immediately before 1 July 2017).  If a capped defined benefit income stream is commuted (whether fully or partially) on or after 1 July 2017, the value required to be used under the current legislation for the transfer balance debit which arises on commutation will be nil due to the current wording of Division 294.  The draft legislation corrects this error by ensuring that there will be a transfer balance debit (calculated in accordance with the proposed amendments to Division 294) arising on a commutation (on or after 1 July 2017 and whether a full or partial commutation).