Late last week, the ATO released ATO ID 2015/2 and ATO ID 2015/3, which consider basically identical facts, said DBA Lawyers director Bryce Figot.
“The benefits of the deceased member consisted of publicly listed shares and cash. The [spouse of the deceased and other member of the SMSF] wishes to remain in the fund and to recontribute the death benefit directly to their member account. In order to avoid transaction fees, the [spouse] wishes to know whether it is possible to transfer the monies from the deceased member’s account to the taxpayer’s own account by way of journal entry,” the ATO stated.
In ATO ID 2015/2, the ATO considers whether the facts constitute a payment of a ‘superannuation death benefit’ for the purposes of s 307-5(1) of the Income Tax Assessment Act 1997, Mr Figot said.
In ATO ID 2015/3, the ATO considers whether the facts constitute a payment for the purposes of reg 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (SISR).
The ATO answered the questions in both ATO ID 2015/2 and ATO ID 2015/3 with a no, Mr Figot said.
He explained that in ATO ID 2015/3, the ATO links payment with cashing and states.
“Cashing involves an SMSF making a payment which reduces the member’s benefits in the fund. Consequently, transferring the shares and cash to the taxpayer’s account from the deceased member’s account via a journal entry would not amount to ‘cashing’ the benefits, and therefore, regulation 6.21 of SISR would not be satisfied,” the ATO stated.
Mr Figot said the reasoning in ATO ID 2015/2 “raises a more interesting question,” with the ATO canvassing what is often referred to as the principle in Spargo’s case.
“In Spargo’s it was held that a payment will occur where two parties both have a present liability or legal obligation to the other (mutual liabilities or mutual obligations) and they make an agreement and set off the liabilities against each other using a book entry,” the ATO stated.
The ATO determined in ATO ID 2015/3 that the principle did not apply, noting, based on the principle in Spargo’s, a journal entry will only constitute a payment if there are mutual liabilities between the taxpayer and the SMSF and there is an agreement between those parties to set off the liabilities.
“There is not a mutual liability in this case as the taxpayer does not have a liability to the SMSF,” the ATO stated.
“In order to avoid transaction fees”. This wouldn’t really be a relevant concern in a spouse death benefit scenario. If this was the concern, the spouse would simply commence a death benefit income stream.
Probably has much more application in a single member fund paying death benefits to adult non-disabled children.
Does this mean that “cash” must physically leave the Fund? If the amount exceeds say $540,000,the surviving spouse would not be able to get the death benefit back into the Fund all in one year?
Is there a ATO new position since ATO ID 2006/132? I can’t tell what is different here?
Dr. Dwyer – I think it would depend if they were pooling assets or had specific assets against a members name. If pooled, I do not see it being a problem because the cheque from the member is banked and a cheque to the member is issued to pay the benefit. There is no change in the underlying assets. If it is one of the minority cases were assets are allocated against members, the same should be applicable and assets re-classified.
What does this article (ATO issues clarity on death benefit payments) say in layman terms please?
Cheers
Hal
Surely this is a case where the ATO could use some common sense. Perhaps the law could be read a little more broadly to allow for this! The world will not come to an end if a “payment” is made by way of a journal entry as opposed to physically moving cash around. The ATO won’t miss out on any tax it’s entitled to. And it would remove a layer of red tape for trustees.
And what if the spouse first hands over a cheque for her contribution which is set off then against the death benefit with the shares then being transferred by journal entry?