The importance of anti-detriment payments from super

Whether a superannuation fund will make an anti-detriment payment (ADP) or not is seldom considered when weighing up the pros and cons of a given fund. But it should be.

It is not compulsory for a super fund to make an ADP, which is payable upon death. Some funds will make an ADP only if your beneficiary is a dependent, such as a spouse or dependent children (adult children are not considered dependents). Other funds will make a payment regardless of your beneficiary nomination and some funds won’t make ADP’s at all.

In simple terms, an ADP is made in the event of death to reflect the contributions tax incurred by the deceased member over their working life.

Any contributions made to superannuation on a pre-tax basis, such as employer (SG) or salary sacrifice contributions, are subject to a contributions tax of 15% upon being received by your super fund. Pre-tax contributions are also known as concessional contributions.

Given most individuals make super contributions on a pre-tax basis and work for about 35 years, a significant amount in contributions tax has often been paid by the time they cease work.

To put this in context, let’s say you earn $75,000 pa, your employer contributes 9% pa to super and your salary increases by 3% pa, you will have paid around $64,000 in contributions tax after 35 years. And this doesn’t allow for any salary sacrifice contributions.

An ADP seeks to reimburse the contributions tax paid during the member’s working life. Upon death, the super fund will perform a calculation to determine how much contributions tax was paid by the deceased member and increase the lump-sum payment to beneficiaries accordingly. An ADP can increase a lump-sum death benefit by as much as 17.6% and can be claimed as a tax deduction by the super fund. ADP’s can only be made where a death benefit is paid as a lump sum, not a pension.

ADP’s came about when contributions tax was introduced on 1 July 1988. At this time, it was decided that death benefits should not be disadvantaged by the new tax, thus super funds were permitted to ‘refund’ contributions tax on the basis that it effectively reduced the account balance and therefore the death benefit payable.

The importance of ADP’s should not be underestimated. For the sake of your beneficiaries, make sure your super fund will make an ADP.