SMSFs are unlikely to be able to argue a member benefit should retain that status if it was requested before the death of a member, but paid afterwards as the fund’s trustees will know the exact moment the member died, according to an SMSF legal expert.
Merthyr Law director and SMS specialist adviser Kieran Hoare said updated guidance from the ATO regarding the treatment of a member benefit at the time of the death of a member had removed any ambiguity for the SMSF sector and the likelihood they will get a positive determination if seeking a private binding ruling (PBR).
“The ATO recently updated its website and changed their approach, stating that if a superannuation fund member requested an amount to be paid from their fund but died before they received it, the payment might be a member benefit in some limited cases,” Hoare said in an online presentation hosted by the Institute of Financial Professionals Australia today.
“The new guidance says the trustee has to make a determination, based on the facts, whether the payment is a member benefit or a death benefit.
“A key issue raised by the ATO is that what knowledge the trustee had at the time the payment is made of whether that member has died.
“I can’t think of too many SMSFs where the trustee would not know that a member had died so that may be, as far the ATO is concerned, a big roadblock.
“For those looking at a PBR application, if you have got the circumstances in an SMSF where the payment was not prepared before the member died, you might get a negative result.
“So rather than thinking of whether you should go for a PBR, look at legal advice or case law or an interpretation of the trust deeds rather than getting knocked back on a PBR application.”
He added SMSFs could build in a provision to their trust deed that allows members to withdraw benefits on their death bed, which are then no longer held on trust by the superannuation fund, but held by the trustee on bare trust for the member.
“That provision clarifies the trust relationship and that the member has been paid out even though we have not transferred the legal title to those assets yet and via the trust deed backs up that strategy,” he said.