The concept and benefits of paying superannuation death benefits by journal entry can be emulated by SMSFs through paying a death benefit pension.
“Paying something by journal entry means transferring the interest of the deceased directly from the account to the beneficiary by book entry – the stroke of a pen – rather than physically having to cash in investments and transferring assets across, et cetera,” Townsends Business and Corporate Lawyers estate planning and superannuation special counsel Brian Hor told the latest Super Central Bacon Super and Eggs seminar.
“The main reason you’d want to do this is to simply avoid all the hassle of disposing of and acquiring assets, but also you avoid contribution rules and asset protection for the death benefit, and of course there are transaction costs of doing the transfer.”
He said while family trusts were able to pay super death benefits via journal entry, SMSFs were a concessionally taxed trust and needed to apply the terms of the Superannuation Industry (Supervision) Act.
According to case law, there were no mutual liabilities between the SMSF and the taxpayer where there was an agreement to offset those liabilities via journal entry, he said.
In addition, the ATO’s past pronouncements deemed that journal entries did not meet the requirement that superannuation death benefits must be cashed.
“So why don’t husband and wife simply make a death benefit nomination to each other to pay a pension because if you do that, it’s got all the same benefits as a journal entry and if you want flexibility just have a non-binding nomination,” Hor said.
Further, the death benefit pension could be rolled back into a super accumulation account without having to be cashed out and recontributed to the fund, provided they were a spouse, he said.
“In order to roll back that death benefit pension, you’ve got to wait until after the prescribed period has ended – the latest of six months after death, three months after grant of probate or six months after the end of legal action,” he said, adding the amount rolled back was excluded from the contribution caps.
“If you do it too soon it will be treated as a death benefit lump sum, and if you’re not a spouse and you want to take a lump sum and try to put it back into super, sorry, contribution caps will apply.
“So where a spouse commutes a death benefit income stream outside the prescribed period to roll back over into another income stream, for example, to change provider, the income stream will no longer be treated as a death benefit pension and will be taxed accordingly as a normal super pension.”
He underscored the importance of an enduring power of attorney for both husband and wife.
“Just in case one of the spouses loses capacity, it means that attorney may be able to make an appropriate death benefit nomination to pay the surviving spouse a pension, if the member themselves are unable,” he said.
