SMSF trustees should document any reasons for delays that prevent a death benefit being paid out as soon as practicable to avoid the fund auditor flagging it as an issue or the timeframe extending past the ATO’s deadline for action, an SMSF technical expert has advised.
Heffron head of education and content Lyn Formica said the death of a member and the compulsory payment of a death benefit were often the source of a management letter or auditor contravention report as trustees failed to complete the latter in a timely way.
“In terms of a timeframe, the super law requires a deceased member’s benefits to be dealt with ‘as soon as practicable’ after death. Neither super nor tax legislation specifically define ‘as soon as practicable’,” Formica said in a recent blog post.
“However, the ATO has previously indicated that as a general principle, it expects six months is more than enough time for most SMSFs to deal with a death benefit.
“In cases where this is not possible, we suggest trustees document the reasons why, when the death benefit is likely to be dealt with and why they feel they are still within the ‘as soon as practicable’ timeframe.”
She said factors that may cause acceptable delays in the payment of death benefits included the time taken to locate potential beneficiaries and trustees determining who will receive the benefit and in what form, as well as the tax consequences of that payment.
Legal disputes, obtaining up-to-date valuations of fund assets and calculating the deceased’s account balance or balances were also acceptable reasons for delaying a death benefit payment, she added.
She also noted that where a lump sum benefit payment took place, SMSF auditors may raise concerns about the number of lump sums that are paid as superannuation law only permits two payments made up of an interim amount that does not exceed the value of the member benefit and a final payment.
“This recognises that sometimes there will be a period in which the exact amount to be paid is still being finalised and it might make sense to partially pay out the death benefit in the meantime,” she said, adding the two-payment rule applied to each beneficiary and each super interest held by the deceased.
“If an individual had two pensions and an accumulation account, then the trustee could pay out the benefit to a single beneficiary in up to six lump sums. If there were two beneficiaries, up to 12 lump sums could be made.
“There is no equivalent limit on pensions – in theory an unlimited number of pensions could be commenced for any eligible beneficiary from a single super interest of the deceased.
“Whilst we are not aware of the ATO seeking to attack trustees who inadvertently fail this rule, it is something trustees and their advisers should be mindful of before any amounts are paid from the fund.”
