Death benefits

Tax-free benefits need relationship shift

tax-free benefits

Benefit payments requested before death but paid afterward can be tax-free only if an SMSF member has altered their relationship with their fund.

SMSF members can ensure a withdrawal from their fund before their death but paid after they pass away will be treated as tax-free benefits if their relationship with the fund is changed from beneficiary to debtor, according to an SMSF consultant.

SuperCentral SMSF executive consultant Michael Hallinan said a private binding ruling (PBR) by the ATO commissioner showed it was possible for a payment to a member after death to still be counted as a superannuation member benefit, rather than a death benefit, and be treated as tax-free.

Pointing to PBR 1051988780639, Hallinan gave the example of a fund member, Tarquin, with a pension balance of $1.5 million from which he draws a tax-free pension, and who is also a co-director of the corporate trustee for the fund and has in place a binding death benefit nomination to split his benefit equally between his three children.

He said, based on the PBR, it was possible for Tarquin to have an arrangement in place that will allow the withdrawal of his entire super balance shortly before his death and make it payable to him tax-free.

“Tarquin would have to prepare and sign (but not date) a full cashing request in respect of his pension and the payment as a lump sum of the pension account balance to him,” he said.

“When the time was appropriate Tarquin could date (or have his duly authorised agent date) and serve the full cashing request on the trustee.”

He added the directors of the corporate trustee would acknowledge the receipt of the cashing-out request and authorise the processing of the request as Tarquin has exercised a right to cash out his super, but this act would change his relationship with the fund.

“Before the relationship was beneficiary-trustee and now the relationship is creditor-debtor,” he said.

“Once the creditor-debtor relationship has been established, the payment of the benefit to Tarquin will be a superannuation member benefit rather than a superannuation death benefit.

“This will be the case even if Tarquin dies after the full cashing-out request has been received by the trustee and before the benefit has been paid.”

The key issue was whether Tarquin had an unconditional right to fully cash out his pension and if he exercised that right before he died, he said.

“Having served the cashing-out request on the trustee before he died clearly shows the exercise of this right. Upon service of the full cashing request, Tarquin has the legal right to the immediate payment of his pension balance,” he said.

“The fact that that trustee only discharges that legal right after Tarquin’s death is irrelevant. The fact that the trustee is aware of Tarquin’s death is also irrelevant. The fact that fund assets may have to be redeemed to permit the bank transfer is also irrelevant.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital