The outcome of a recent ATO private ruling in which a superannuation benefit was deemed to be a death benefit despite being applied for prior to the passing of an SMSF member could have been avoided by adopting a different redemption process, a specialist adviser has noted.
SMSF Alliance principal David Busoli said the ruling – PBR 1052179436983, involved a fund member commencing a drawdown a week before dying that, due to the administrative process of redeeming investments into cash, was not paid until the day after the individual passed away.
He noted the ATO ruled the benefit was not a member withdrawal but a death benefit and was consistent with its stated position in QC45254 and QC42473 which considers whether a superannuation fund trustee is aware of the death of the member as a key factor in the treatment of a benefit payment.
“Essentially the ATO’s view is, if this [benefit payment] occurs [after death], the benefit is not a member withdrawal but a death benefit. The major exception is if the trustee was not aware the member had died which will never be the case with an SMSF,” Busoli explained.
“The result [in this case] was that the benefit was not tax free but subjected to death benefit tax as the beneficiaries were not tax dependants.”
According to Busoli the end result could have been different if the redemption process had not involved converting the assets to cash first.
“The delay occurred due to the redemption of investments,” he observed.
“As SMSF benefits can be paid in specie, in a dire situation such as this, the trustees could have signed the asset transfer forms at the outset.
“Transfer is effective from the date of signing of a valid transfer form so the member would have received a member benefit before passing.
“Cash would need to have been paid out prior to passing but, presumably, the bulk of cash could have also been paid out.
“Sometimes the obvious course of action is not the best.”
