Death benefits, Documentation

Gaming benefits may be tax exploitation

death benefits tax

Using undated documents to prevent a member benefit being paid as a death benefit may breach rules about promoting a tax exploitation scheme

Financial advisers who are advising clients to create undated documents to claim member benefits upon the death of an SMSF member may be in breach of tax regulations that prohibit the promotion of a tax exploitation scheme, according to an SMSF legal expert.

DBA Lawyers special counsel Bryce Figot said while the ATO had clarified its stance on how it would treat a member benefit paid at the time of death of a fund member, advisers seeking to exploit the timeframes around those events may be breaching the law.

“These arrangements have been exciting for some people who thought they could get all their clients and charge them thousands to put these undated documents in place because everyone is going to die sometime, but you really have to consider the promoter penalty regime [within the Tax Administration Act (TAA)],” Figot said during a recent webinar.

Quoting from schedule 1, section 290‐50 of the TAA, he said an entity must not engage in conduct that results in that or another entity being a promoter of a tax exploitation scheme.

He said the entity mentioned could be an individual adviser or an advice practice and they would be considered a promoter of a tax exploitation scheme under section 290‐60 if they market a scheme and receive, directly or indirectly, consideration in respect of that marketing.

“This legislation was not really designed to capture what is going on with the issue of undated benefit documents, but it could as it’s very broadly drafted legislation,” he said.

He added the TAA also took a broad approach to what was considered a tax exploitation scheme, including that if a scheme was implemented it was reasonable to consider it had been put in place with the dominant purpose of getting a benefit from it.

“If you are about to die, why would you want to pull money out of super?” he said.

“There may be a good non-tax-driven answer, such as the deceased, who was still alive, being moved into aged care and the aged-care facility wanted a large, upfront cash payment, so it was taken from the super fund.

“That’s rarely going to be the case and usually it is people want the benefits before death so they could receive it tax-free because if it happened after death, there’s a higher tax rate.”

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