Death not definitive in lump sum strategy

lump sum payment

A lump sum paid from super will not necessarily be treated as a death benefit even if the relevant member passes away before the payment is made.

An SMSF lawyer has confirmed the treatment of a lump sum payment from a super fund will not change even if the relevant member dies before the payment is made.

The situation has caused some angst among advisers and trustees as to whether the payment would be classified as a death benefit rather than a lump sum withdrawal due to the timing of the relevant events.

Townsends Business and Corporate Lawyers superannuation online services associate division leader Jeff Song noted the Superannuation Industry (Supervision) (SIS) Act dictates how a payment from a fund is treated is dependent upon not only when the payment was made, but also the reason why the payment was made.

Further, Song acknowledged: “The term ‘member benefit’ is defined as ‘a payment to a person from a super fund because the person is a fund member’ whereas ‘death benefit’ is defined as ‘a payment from a super fund after a person’s death because the person was a fund member’.

He recognised at face value the aforementioned circumstances suggest the payment would be classified as a death benefit because the member has died before the payment has been made, but revealed this is not how the ATO has interpreted the situation.

“The ATO’s view in their published private ruling 1051754180223 suggests otherwise and states that the payment is a ‘member benefit’ even if paid after the member’s death provided [certain] conditions are met,” he said.

The relevant conditions are that the payment was made by a fund to the dead member’s nominated account as requested by them immediately prior to their death and that the fund trustee processed the request in accordance with the applicable SIS Regulations requirements for voluntary cashing of unrestricted non-preserved benefits.

“While this is only a private ruling and is not a legal authority to confirm the current legal position, we agree with the ATO’s reasoning in that ruling that when determining the proper legal character of the payment, more weight should be given to the reason for the payment because the member requested the voluntary cashing of their super before death, rather than the mere timing of the cash payment being completed after their death,” Song noted.

The conundrum has arisen from estate planning strategies where members withdraw lump sums so their death benefits will be included as part of their estate due to the fact they have no tax dependants to receive the benefit.

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