A specialist legal firm has reminded advisers the Superannuation Industry (Supervision) (SIS) Regulations pertaining to a death benefit pension must be adhered to before any additional rules governing an income stream to a child can be applied.
Townsends Business and Corporate Lawyers managing director Peter Townsend acknowledged this compliance principle specifically in reference to situations where husband and wife SMSF trustees are wanting to establish child pensions as a means of distributing death benefits, but also wish to prevent their children, as beneficiaries, from taking the death benefit as a lump sum unless absolutely necessary.
In order to fulfil their intentions, the husband and wife trustees would want to include additional trust rules, such as preventing a child pension from being commuted unless the surviving spouse member approves of having the income stream fully or partially stopped.
Townsend stressed a rule like this can govern the trust, but would only be effective if the SIS Regulations providing the definition of a pension are first met.
“The SIS Regulations definition states that a benefit is taken to be a pension if the rules applying to the pension meet the standards of sub-regulation 1.06 (9A),” he said.
“Our interpretation of the sub-regulation (9A) is that it sets out the minimum standards the rules of the pension must meet in order for the pension to be deemed a complying pension under the SIS Regulations.
“A pension with additional rules in place may still qualify as a complying pension, however, the additional rules must not impede compliance with the minimum standards as set out in the SIS Regulations.”
As such, he noted should the child pension fail any of the SIS Regulations set out in regulation 6.21, a commutation would have to automatically occur regardless of any supplementary rules the trustees imposed on the income stream.
Under this regulation, a child is only eligible to receive a beneficiary pension while they are under 18, they are 18 or over but under 25 and are financially dependent on the member, or they are 18 or over but have a disability of a kind described in section 8(1) of the Disability Services Act 1986.
“If the pension agreement is drafted in a way that does not ensure the SIS Regulations requirements taking precedence over any consent power, the pension will not meet the SIS Regulations definition of a superannuation income stream for tax law purposes.” Townsend noted.
“The pension in such event will also result in breach of the mandatory death benefit cashing out requirement under the SIS Act.”