ATO, Death benefits

Benefit treatment not clear cut

ATO SMSF Death benefit Member benefit treatment

The tax implications for a superannuation benefit paid after the unexpected death of a member will depend on several factors.

The ATO will take into account multiple factors when considering the tax treatment of a superannuation benefit after the death of an SMSF trustee, according to a technical specialist.

“From a death benefit point of view, one of the questions [I get] asked a lot is whether or not a benefit is a death benefit or a member benefit [in] a situation where a member requests a benefit to be paid and they subsequently pass away before the benefit is paid,” Smarter SMSF technical and education manager Tim Miller told attendees of a recent SuperGuardian webinar.

“Is it treated as a benefit payment, member benefit payment or a death benefit payment? The ATO is still saying that each case is its own fact.”

Miller pointed out an example provided by the regulator stipulated the determination of the benefit is often decided on a case-by-case basis and will depend on the level of awareness of the fund’s members about a respective death event.

“The issues are going to come down to the terms of the request, the terms of the deed and any other governing rules, knowledge [and] the time the payment is made, including whether they are aware that the member has died,” he said.

“[The ATO will also consider] the entity that the payment is being paid to, the circumstance and timing of the payment and whether the payment is made because of and in line with the request made by the member.

“Now the issue here is that SMSF trustees are obviously far more aware of when a member passes away than the trustees of an Australian Prudential Regulation Authority (APRA) fund. So it’s harder to argue the fact that a benefit is a member benefit versus a death benefit in an SMSF set of circumstances.

“However, it may very well be that the member has initiated a benefit payment and they have started doing in-specie transfers or they have lodged a request to sell down an asset to pay a benefit out and in the time all of that occurs, they also happen to pass away.

“In that instance I would be saying the answer is it depends and go to the ATO for clarification.”

Aligning with Miller’s comments, the ATO has made two private rulings in recent months demonstrating its application of the rules in regards to a trustee’s awareness of a member’s death.

In November last year, it ruled a benefit paid one day after the death of an APRA fund member was a member benefit as the trustee had to be aware of a number of key facts, including the member’s death, and that was not the case.

In a decision with similar timing released earlier this week relating to an SMSF member, the ATO found the trustee was aware of the member’s death and thus the outgoing benefit was a death benefit.

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