SMSFs paying death benefits to testamentary trusts should check the status of the beneficiaries of the trust as an incorrect one will wipe the tax-free status from any lump sum benefits.
SMSF Alliance principal David Busoli said a private binding ruling handed down late last year highlighted the need to ensure beneficiaries of testamentary trusts receiving superannuation death benefits were Superannuation Industry (Supervision) (SIS) Act dependants to ensure the tax-free status remained intact.
Busoli said the ruling considering the circumstances where a super death benefit was paid, via the estate, into a testamentary trust.
“The beneficiaries of the testamentary trust included beneficiaries who would be classed as super death benefit dependants so the ruling considered whether the lump sum death benefits should be free of tax or if the payment to the testamentary trust rendered the benefits taxable,” he said.
He added the testamentary trust beneficiaries were defined as the deceased’s spouse and lineal descendants and the trustee of any trust in which the primary beneficiaries were named as beneficiary, and any proprietary company in which any primary beneficiary is a director or beneficial owner of any type of shares.
“For super death benefits to be tax-free, there needs to be certainty that only death benefit dependants will benefit from them,” he said.
Busoli added that in this case, under the terms of the testamentary trust, beneficiaries could be a range of people including the deceased’s spouse – who was a death benefits dependant of the deceased; as well her lineal descendants, including people not yet born, and certain entities, including those not in existence yet – of which the latter two were not considered as death benefits dependants of the deceased.
“As a consequence, the death benefits were subject to tax as if they were paid to non-death benefit dependants. This would not have been the case if the terms of the testamentary trust had been restricted benefits to SIS dependants,” he said.
“Existing testamentary trusts, intended to be used in this way, need to be checked.”