The Australian Taxation Office has issued a reminder to trustees of self-managed super funds about the need to deal with death benefits expediently. It says errors are common.
When an SMSF member dies, the SMSF generally plays a death benefit to a dependant or other beneficiary of the deceased.
If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream. The income stream can be new or a continuation of an existing income stream.
A dependant may be the deceased’s spouse, a child of the deceased or an interdependent relationship.
If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum.
The superannuation rules say death benefits must be dealt with by the fund as soon as practicable.
Pensions paid from super (including death benefit income streams) have a minimum pension payment requirement.
The ATO says a number of questions have recently been raised by the SMSF sector around the interaction between compulsory cashing requirements when a member dies and the requirement to pay a minimum pension amount each year.
“Cashing a death benefit in the form of a pension only satisfies the compulsory cashing requirement as long as the interest continues to be cashed in that form,” it says.
“Therefore, if the pension ceases because the minimum amount has not been paid, the trustees may be contravened superannuation rules.”
Where the underpayment is small or the result of an error, the trustee may be able to self-assess whether they can apply the exception to treat the fund as having continuously paid the pension, despite the underpayment. If the exception can be applied, the fund has not committed a breach.
Where a contravention has occurred, trustees need to act quickly to prevent further possible contraventions by ensuring the death benefits can still be considered to be cash “as soon as practicable”.
This could be achieved by:
- Immediately cashing the benefit in the form of a new retirement phase income stream as soon as they become aware of the breach;
- Cashing the benefit in the form of a lump sum (either as a single lump sum or as an interim and final lump sum); and
- Rolling over the interest that supported the death benefit income stream pension to another complying super fund for immediate cashing as a new death benefit income stream.
These options are about preventing future contraventions. They won’t remedy the breach that’s already occurred for failing to meet the compulsory cashing requirements.
As long as one of these actions is taken immediately, the ATO will accept that the trustee is meeting on a go-forward basis the requirement to cash the benefits “as soon as practicable” and will not therefore have further contravened the rules.
Failure to resolve the matter may have significant compliance consequences.