By Graeme Colley
The passing of a friend or loved one is an already traumatic experience, the last thing anybody needs is to be breached by the ATO for not paying SMSF death benefits correctly.
Receiving a qualified audit report for a breach of the superannuation standards can be very upsetting in an already upsetting time so we are here to guide you through the right processes so that there is no danger of this occurring during a trying time in your life.
The first step is understanding the Superannuation Industry (Supervision) Regulations under which lump-sum payments of death benefits are limited to an interim and final lump sum. Why this is important is because it contrasts with other superannuation lump sum payments that are paid after retirement which can be withdrawn at will.
This is not the case with death benefits from SMSFs, especially when the lump sums may be made as a number of in-specie transfers of investments to a beneficiary or the estate of the deceased.
Regulation 6.21 of the SIS Regulations makes it difficult for the trustee of an SMSF to pay lump sums and be compliant at the same time. This regulation states that on a member’s death a compulsory condition of release has taken place which requires benefits to be paid as lump sums and/or a pension. For lump sums, the payment can be made as one amount or as an interim lump sum plus a final lump sum.
Where this gets challenging is that under section 58 of the SIS Act it is possible for the deceased member to have directed that the trustee is required to transfer parcels of shares or other fund investments to the beneficiary or their legal personal representative - and the trustee is required to comply with the direction. Each cash payment, investment or parcel of investments, such as company shares, that are transferred are required to be treated as a separate lump sum.
As an example, a member may have directed the trustee to transfer certain investments in specie (other than in cash) to the beneficiary or the trustee may have exercised their prerogative and transferred some fund assets to a beneficiary or the deceased member’s estate. If the death benefit consists of more than two lump sums such as a couple of cash payments and the transfer of a number of investments then the requirements of regulation 6.21 would be breached.
With auditors paying greater attention to funds complying with the legislation we are seeing many more issues being raised with trustees. In some situations where trustees and their advisers are conscientiously sticking to the rules, they end up with solutions that weasel around the law to comply with the payment of death benefit lump sums.
This is being done by death benefit pensions commencing and making a number of lump sum commutations. The only trap here is that commencement of the death benefit pension may run into trouble with Transfer Balance Cap issues.
It would be good to see a practical approach provided in the legislation for the compulsory payment of lump-sum death benefits to take multiple lump sums into account. This would be preferable to forcing trustees to fall back on an artificial solution such as multiple lump sum commutations of death benefit pensions. For integrity purposes, maybe the legislation could be amended so that a time limit be placed on death benefit lump sums subsequent to the member’s death.
As a guide, it is generally accepted in the industry that a period of six months after the member’s death is reasonable to pay lump sums or commence pensions and meet the requirement in regulation 6.21 that the death benefit has been ‘paid as soon as practicable’. If the benefit cannot be paid within six months then late payment of the benefit needs to be supported by providing a reasonable excuse.
The delay on the basis of a reasonable excuse could be due to challenges to the benefit payment, the appointment of a legal personal representative or other significant reasons. The payment of superannuation death benefits is probably due for an overhaul because of the manner in which lump sums can be paid from the fund. A change which would result in multiple lump sums being paid within a set period would overcome the technical traps that now exist and inadvertently lead to breaches of the SIS regulations.