The ATO has updated its website and removed its six-month guidance for paying out death benefits as soon as practicable.
As we know, death benefits must be cashed as soon as practicable after the member dies, in accordance with the requirements of Superannuation Industry (Supervision) (SIS) Regulation 6.21(1).
The ATO previously indicated at QC 42934, now no longer available, that it considered as soon as practicable to mean six months after a member’s passing was more than enough time to pay out a tax benefit.
The practical application of such a short timeframe was almost impossible to achieve effectively, setting trustees up for consistent failure at a time of profound grief.
When trustees and family members of the deceased are trying to organise a funeral, register the death, stop Centrelink payments, deal with financial institutions and more, the expectation was still for trustees to turn their attention to the SMSF, liquidate the deceased member’s assets and pay them to their beneficiaries within six months.
Considering that obtaining the grant of probate could take anywhere from six to 12 months, a death benefit payout was unlikely to be accomplished within a shorter timeframe.
Where there was an absence of documentation citing why the delay exceeded six months, it meant SMSF auditors technically had no discretion but to qualify their audit report for breach of the payment standards.
Realistically, however, SMSF auditors typically provided a slightly longer lead time to pay death benefits, understanding that grief does not have a fixed timeframe.
The ATO has now replaced QC 42934 with QC 45254, withdrawing its six-month definition of as soon as practicable. It provides significant relief for grieving trustees, offering much-needed flexibility when they require it most.
The update also aligns with the tax provisions repealed on 1 July 2017 allowing trustees to approach the distribution of death benefits with the time and attention required without the pressure of an unrealistic deadline.
One reason why the six-month definition existed was so SMSFs could continue to claim exempt current pension income (ECPI) when the deceased member has a retirement interest.
Understandably, the ATO tried to limit that timeframe because the fund could continue to claim ECPI indefinitely, which acted as a disincentive for trustees to pay death benefits.
While the six-month definition is not enshrined in SIS law or the Income Tax Assessment Act, how long is too long for an SMSF to benefit from claiming ECPI?
What about illiquid assets? While it may take more time to sell some assets because there is no ready market, should SMSF trustees be allowed to take as long as they like to sell assets because the market is not paying the price they want?
It would be unrealistic to expect an SMSF auditor or the ATO to accept this as a reasonable excuse for such a delay.
Notwithstanding, SIS Regulation 6.21 still states “a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies”.
In most cases this would occur within six to 12 months of the member’s death, ensuring all legal requirements have been adequately addressed.
It would be advisable to document any reasons for delays beyond this period to ensure the fund’s auditor and the regulator are aware of the circumstances affecting the trustee’s ability to meet their responsibilities and obligations.
While trustees must act honestly in all matters concerning an SMSF, they must tread carefully to ensure they are not inadvertently taking advantage of an extended timeframe when paying out death benefits.
The ATO has provided SMSFs with a long-awaited, realistic approach and it is now up to trustees to responsibly manage fund assets during this transitional period.
Shelley Banton is head of technical at ASF Audits.
