ATO, Pensions

Confusion again surrounds death benefit pensions

treatment of death benefit pensions

An ATO update regarding the treatment of death benefit pensions that have failed to meet minimum pension standards has raised more questions for the sector.

The SMSF sector remains confused about the treatment of death benefit pensions that have failed to meet the minimum pension standards.

The revelation comes after the ATO updated its guidance on the issue yesterday.

The problem arose regarding the status of a death benefit that had not satisfied the required minimum payments in a financial year. In this situation it was unclear if the death benefit pension had to be exited from the superannuation system and paid out as a lump sum as the breach meant it no longer qualified as a legitimate pension.

In response to the matter, the ATO last week confirmed death benefit pensions in this situation are considered to have breached Superannuation Industry (Supervision) Regulation 6.21, but conceded as long as the SMSF member restarts the pension as soon as they can, then a breach will not be deemed to have occurred.

However, in a further clarification yesterday, the regulator announced this concession only applied to reversionary pensions.

In relation to this development, Accurium SMSF technical services manager Melanie Dunn said in a blog: “The original guidance in our view was relevant to both a new death benefit income stream taken by an eligible beneficiary and a reversionary income stream that is paid to a beneficiary upon death of the original pensioner.

“As such, the change to the ATO’s guidance to say it relates only to reversionary income streams has us confused.”

Further, Dunn questioned whether this meant a death benefit income stream that is not a reversionary pension must be cashed as a lump sum if it fails to meet the pension standards in a year, and whether the guidance only applies in the year of death where the reversionary income stream fails to meet the minimum pension standards and not for a failure in any subsequent years.

SuperConcepts SMSF technical services executive manager Mark Ellem concurred with Dunn’s confusion.

“My question is: Are death benefit pensions that are commenced not as a result of a reversionary pension outside this and do we still have the same problem that we have to cash it all in in one lump sum?” Ellem told selfmanagedsuper.

“So the update from the ATO that says this only applies to reversionary pensions seems to have raised a few more questions rather than clarifying the position.”

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