The arrangement of the affairs of an SMSF to pay death benefits should be seen as an ancillary purpose of the fund and not one of its core purposes and efforts to prioritise those payments may breach the sole purpose test, a technical specialist has noted.
Smarter SMSF education and technical manager Tim Miller said all decisions regarding the operation of an SMSF had to align with the sole purpose test and to achieve that a fund had to be maintained solely for the core purposes outlined in section 62 of the Superannuation Industry (Supervision) Act.
“When we look at these core purposes, there are three, but I reference it generally as the primary two, benefits for retirement and for reaching age 65, and then the third purpose, from an SMSF point of view, is death benefits,” Miller said during an online presentation hosted by SuperGuardian today.
“It is important to understand the provision of benefits when someone retires is first because many people will retire before 65, and if they don’t retire before 65, then the objective is to reach a particular age, which is currently 65, so once we’ve satisfied those conditions, we can start the payment of the benefit.
“Looking at the death benefit from a core purpose point of view, the relevance here is if you pass away before you retire or before you reach 65, then the core purpose of the fund is to provide benefits to the member’s beneficiaries.”
He said this reinforced the notion superannuation was not designed to be an estate planning vehicle other than as an ancillary purpose after meeting its core purposes under section 62.
“If you don’t make paying a death benefit a core purpose, once you have retired or reached 65, then, in addition to paying yourself a benefit, the fund has the capacity to pay out a death benefit to beneficiaries, but that fits under that ancillary purpose,” he said.
“We must have that link to a core purpose and then we have the ability to pay benefits under those ancillary purposes as well.
“The good thing is you don’t have to state which purpose the fund is operating for. We just need to have it stated from a member and trustee point of view where they say ‘our objective is to pay benefits for ourselves in retirement’.”
