SMSF members can use their fund to boost the balances of a non-dependant without any funds leaving the superannuation system or losing tax concessions, an SMSF compliance firm has noted.
SuperCentral managing director Peter Townsend said regulation 6.22(2) of the Superannuation Industry (Supervision) (SIS) Regulations prevented an SMSF member’s death benefit being cashed out in favour of any non-dependants of the deceased member, or their legal personal representative.
In an update on the SuperCentral website, Townsend noted a dependant was defined under the SIS Act as the deceased member’s spouse or child, or a person who was dependent on the deceased member immediately prior to the latter’s death.
“Given these limitations, how would you go about effectively transferring the member’s superannuation death benefits to a person who is not one of those listed types of persons and therefore not a dependant?” he said, adding it could be passed out to the deceased member’s estate and then paid to the non-dependant beneficiary.
This would, however, mean the funds would exit the superannuation system and lose any tax concessions, while also exposing assets to capital gains tax triggers, but this could be avoided using a withdrawal and re-contribution strategy available to SMSF members.
Under the strategy, Townsend said the chosen beneficiary would join the SMSF of the member looking to pass on the benefit and the “main member then withdraws an appropriate amount that they gift to the chosen beneficiary, who then uses that money to make a non-concessional contribution to the fund”.
“What that means is that over time the main member’s balance is going to progressively fall and the chosen beneficiary’s balance is going to rise,” he said.
“If you can do that for long enough and the payments are under the non-dependant’s non-concessional contributions cap, then the member’s balance is gradually transferred to the non-dependant without the need to worry about regulation 6.22 because it is irrelevant.
Townsend noted this would reduce the death benefit of the main member, but this would place less strain on the liquidity of the SMSF at the time the benefit was paid.
“This in turn will mean any large illiquid assets that would otherwise have had to have been sold to pay out a larger death benefit could be retained within the superannuation environment, netting the non-dependant a more favourable financial position,” he said.
He highlighted the strategy hinged on the time it would take for the member to transfer funds to the non-dependant and was limited by the latter’s transfer balance cap and non-concessional contributions cap.
“It is also worth noting that the strategy should be fully and carefully documented, particularly the deed of gift of the withdrawn super benefit from the main member to their chosen non-dependant,” he said.
“Given that the dominant purpose of the strategy is to increase the non-dependant’s superannuation and not to avoid tax, any small tax saving which results would likely not form the basis of a challenge under Part IVA [of the Income Tax Assessment Act 1936].”
