Death benefits, Regulation, Tax

Death benefit payment delay risky

Death benefit Payment Pension Lump sum ECPI

SMSF trustees have been urged to promptly distribute death benefits as doing so is believed to reduce the likelihood of unintended consequences.

Delaying the payment of a death benefit may potentially expose the funds to a higher level of taxation unless they can show grounds for not acting sooner, a technical manager has warned.

When asked by an attendee of a recent webinar about the implications of postponing the delivery of a benefit on the death of a member, Accurium head of education Mark Ellem said there were two main issues that could come back to bite the fund member.

“We know the SIS (Superannuation Industry (Supervision)) Act requires the member’s death benefit to be cashed as soon as practicable. It’s not defined, but everyone uses the rule of thumb of six months,” Ellem noted.

“If you don’t pay the death benefit within the as-soon-as-practicable timeframe, there’s a couple of consequences. One is the fund may not be able to claim exempt current pension income (ECPI) in respect of a member who died that was in receipt of a non-reversionary pension.

“The tax regulations allow you to continue to claim ECPI in relation to that interest, but you have to comply with SIS Regulation 6.21 to pay it as soon as practicable. So you might jeopardise the fund [being able] to claim ECPI.

“The worst-case scenario here is if you haven’t considered paying the death benefit as soon as practicable, then you haven’t met the payment standards.

“If you haven’t met the payment standards when you ultimately pay the death benefit, the full amount of the death benefit will be fully assessable to the individual who receives it potentially. It doesn’t matter whether it’s to a tax dependant or not.”

To prevent the death benefit from being taxed at a larger amount, he suggested trustees would need to supply a legitimate reason why the death benefit could not be paid.

“My view is that both advisers and trustees need to keep records to show what’s preventing the fund from paying a death benefit. Are we waiting on a probate? Is there a dispute going on over the estate which may flow over into the fund?” he said.

“There’s a whole heap of private binding rulings the ATO has issued that you can look at which give an indication of what the ATO considers a hold-up that still means the fund pays as soon as practicable.

“[If there’s nothing] holding it up, get it paid out by either lump sum or pension.”

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