An ATO ruling to pay a member benefit that had been accepted but not processed before the member died has created an anomalous situation leading to questions as to why it could not be applied in other cases, according to an SMSF legal expert.
DBA Lawyers senior associate William Fettes said the ATO made the decision as part of a private binding ruling in November 2019 in relation to a situation where a fund member had completed an application to receive a lump sum payment on the basis of attaining preserved age and satisfying the retirement condition of release, and mailed it to their fund.
The application was received by the fund, subsequent to the member’s death, which was followed by the application being processed and funds deposited into the deceased’s personal bank account.
Fettes, speaking during a recent webinar, said under the ruling the ATO held the payment was not a death benefit but rather a member benefit payment.
“That is interesting because the ATO held the definition of a death benefit was based on ‘a payment to you from a superannuation fund, after another person’s death, because the other person was a fund member’ and this payment did not satisfy that definition,” he said.
“Rather, it was a payment broadly on behalf of the member under section 307-15 of the Income Tax Assessment Act, which says ‘a payment is treated as being made to you, or received by you, if it is made a) for your benefit or b) to another person or to an entity at your direction or request’.
“There was an application in place but the money was not paid out prior to death, but according to the private ruling the payment was a superannuation member benefit and formed part of the member’s estate.”
He said he regarded the decision as an anomalous outcome and quite permissive if applied more widely.
“I am sceptical because it has never been held that applying to receive benefits is sufficient, objective evidence of it being cashed and to do so requires a transfer of money or beneficial ownership, but an application to a trustee to receive benefits that invokes 307-15 is very different,” he said.
“This is being invoked for something that has not happened when the member was alive and as far as I am aware this is novel application of that principle.”
He also questioned what conclusions could be drawn in relation to tax-effective succession planning outcomes.
“We could have a member on their deathbed making a request to withdraw all my benefits and as long as it is submitted by express post to the trustee before death, that should be enough,” he said.
“Is the ATO really going to say that is allowed, and for members over 60 to pull all their super out tax-free where there are no tax dependants to pay to would open a massive can of worms for the ATO.
“This taxpayer has got a windfall answer, but if this was to be opened up, why could it not apply to an SMSF or public offer fund and everyone could do a pre-death withdrawal strategy based on a mere application to receive a lump-sum payment.”