SMSF trustees that fail to make minimum payments from a death benefit pension should be aware they have an additional set of standards to meet beyond those in Taxation Ruling (TR) 2013/5, a technical specialist has pointed out.
Heffron head of education and content Lyn Formica said where a death benefit account-based pension did not meet the payment standards, it was initially subject to the same treatment a conventional pension underwent in the circumstances.
“Many of the consequences are exactly the same, in the sense that this death benefit pension has ceased for tax purposes at the start of the failed year,” Formica told practitioners during a webinar yesterday.
“It’s also permanently tainted and can never be considered for exempt current pension income (ECPI) again. If we want to get ECPI back, we’re going to need to commute this pension and start another pension.
“If we have taken some payments from this pension account, even though it’s a death benefit pension, they are going to be lump sums.”
She noted these were the requirements stemming from the ATO’s update to TR 2013/5 and apply from the 2025 financial year onwards, but additional actions related to compulsory cashing would also have to be taken.
“If a member of a superannuation fund dies, their death benefit needs to be cashed, which means paid either out as a lump sum or in the form of a pension,” Formica eplained.
“If we decide on a pension, it has to be continuously paid and the fact that we didn’t pay a pension for a particular financial year means we failed the compulsory cashing rules.
“The ATO formerly had some web guidance that indicated whilst you have a breach and can’t undo that, we can get ourselves back on track if we commence another death benefit pension or take it out as a lump sum or roll it over to another fund.
“That guidance has disappeared from the ATO website and I’m not aware of them having a different interpretation. I would be following that form of guidance and taking steps to stop that failed pension and start another death benefit pension so that you’ve met your compulsory cashing rules again.”
She also pointed out the treatment of the pension would differ to what was stated under TR 2013/5.
“The other problematic part about death benefit pensions is a failed pension is no longer considered a separate superannuation interest and combines with any accumulation account the member happens to have,” she confirmed.
“However, what we’ve got here is normal super money sitting in the accumulation account and a death benefit pension. We can’t combine those and will cause a breach of the super laws if we do.
“Normally, we would process a commutation if we fail to pay the minimum from a normal pension, but we’re not going to do that for a death benefit pension.
“We don’t want to process that commutation yet because we want to be able to keep the pension intact in the current financial year if the member is going to commute it.
“They will need to take a pro-rata minimum first and then we’ll have a real commutation and a starting of another death benefit pension.”
