ATO, Compliance

ATO urges caution on death benefit income streams

Death benefit income streams

Death benefit income streams must satisfy minimum pension requirement in order to meet compulsory cashing standards, the ATO has warned.

The ATO has reminded trustees that failure to meet the minimum pension payment requirements for death benefit income streams may mean they are unable to satisfy the compulsory cashing requirements for their SMSF.

“Pensions paid from super (including death benefit income streams) have a minimum pension payment requirement, and a number of questions have recently been raised by the SMSF sector around the interaction between compulsory cashing requirements when a member dies and the requirement to pay a minimum pension amount each year,” the SMSF regulator said.

The regulator stated cashing a death benefit as a pension would only meet compulsory cashing requirements if the interest continued to be cashed in that form, adding that if the pension ceased because the minimum amount had not been paid, the trustees may be in breach of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

It also said trustees had the option of applying the exception to treat the fund as having continuously paid the pension despite an underpayment, as long as the underpayment was small or the result of an error, in which case the fund would not contravene the regulations.

In the event of a breach having occurred, it urged trustees to prevent future contraventions by ensuring the death benefit could still be considered to be cashed ‘as soon as practicable’ by cashing the benefit as a new retirement-phase income stream immediately after becoming aware of the breach.

In addition, it noted trustees could prevent further contraventions by either cashing the benefit in the form of a lump sum or rolling over the interest supporting the death benefit income stream pension to another complying super fund for immediate cashing as a new death benefit income stream.

It warned this would not fix the breach resulting from the fund’s failure to meet the compulsory cashing requirements, but might help trustees prevent future contraventions of the regulations.

“As long as one of these actions is taken immediately, the commissioner will accept the trustee is meeting on a go-forward basis the requirement to cash the benefits ‘as soon as practicable’ and will not therefore have further contravened the SISR,” it said.

“Failure to resolve the matter may have significant compliance consequences.”

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