ATO, Death benefits, Pensions

Commutation delays may alter benefit

ATO private ruling commutation member benefit

SMSF trustees who fail to promptly action a request for a pension commutation may cause it to be treated differently by the ATO if the member circumstances change.

SMSF trustees who receive a legitimate request to commute a pension from a member who dies after the request is made should action it quickly to prevent the ATO viewing a late commutation as a death benefit rather than a member benefit, according to a legal firm.

SuperCentral self-managed superannuation executive consultant Michael Hallinan said a recent ATO private binding ruling (PBR) stated that because an SMSF trustee took more than 28 weeks to pay a commutation lump sum, the benefit was considered to be a death benefit and not a member benefit.

This took place despite the request being lodged before the member’s death and the ATO accepting the member had a right under the SMSF trust deed to commute the pension and the commutation process was in order.

“The ATO accepted that the pension was an account-based pension and that the member had the right under the trust deed of the SMSF to fully commute the pension,” Hallinan said in an update released by SuperCentral, noting it was only after the completed pension commutation and payment instructions were received and acknowledged by the trustee that the member died.

He also highlighted the ATO was consistent with its recent stance regarding the treatment of member benefits requested before, but paid out after, the death of a member, stating the benefit in this case was a member benefit, but then qualified that position based on the trustee’s actions.

“The PBR then proceeds to undermine the clarity of the member/death benefit distinction based upon the reason for the payment with the distinction now being based upon the trustee having to consider a shopping list of relevant matters,” he said.

This list included whether the payment was made because of, and was consistent with, the member’s request and appeared to shape the PBR’s outcome.

“This seems to be the factor which persuaded the ATO that the commutation payment should be treated as a death benefit rather than a member benefit, which is that the significant and unexplained delay in payment gave rise to the inference that the relevant parties had withdrawn the commutation request or simply ignored the commutation request – not by express resolution but by their conduct,” Hallinan said.

“Consequently, when the commutation was made, the pension had been commuted, but not pursuant to the member (or their authorised agent’s instruction), but by reason of the death of the member in circumstances where the pension was not reversionary.

“In the case of SMSFs, [this] factor is of much greater risk given the close connection between the trustee and the member and the possibility that the member’s spouse or legal representative may control or be involved in the control of the fund after the death of the member.

“In short, there must be no extended delay between the commutation instruction being made and the payment – a rule of thumb of six weeks or less.”

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