The ATO has definitively declared its position on a common situation involving the treatment of SMSF member benefits following the unexpected death of the member during a requested benefit transaction.
Specifically, the regulator has stated in circumstances where an SMSF member has made a request to draw down their retirement savings benefits, but dies before those benefits are paid, the payment when made will be treated as a member benefit and not a death benefit.
“Why does it matter? Well it matters because if, for example, it’s a member benefit, then binding death benefit nominations have no claim. It’s a member benefit and it’s paid to the estate so trustees have no play over where the money’s paid,” SMSF Association deputy chief executive and director of policy and education Peter Burgess explained at the SMSF Association National Conference 2022 in Adelaide recently.
Burgess noted there are additional implications if the deceased member was over the age of 60.
“If the deceased is over 60, it’s tax-free. If it’s a death benefit, yes binding death benefit nominations come into play, and it’s paid to a non-tax dependant, it’s subject to tax,” he said.
“So it does matter whether this is death benefit or a member benefit.”
According to Burgess, the ATO’s position does make sense from an Australian Prudential Regulation Authority-regulated fund perspective as their trustees would in most cases not know if the member has died before their benefit payment has been made, but this did not mean it is without problems for SMSFs.
“The question I have with this is that if it is a member benefit [and] if I’m a beneficiary of a binding death benefit nomination and the trustees of an SMSF paid [the amount] out as a member benefit knowing full well that the member has died, I’m not going to be very happy,” he noted.
“This has got litigation written all over it.”
He concluded a definitive answer for the procedure in these situations will not be known until associated litigation is heard in the courts.