Last week, the ATO released new information on what action SMSF trustees should take where they have failed to meet the minimum pension payment requirements for a death benefit income stream.
While the ATO confirmed that if you fail to pay the minimum, then you have breached the compulsory cashing requirements under regulation 6.21, they have also made it clear that a trustee can commence a new pension, and that would still be considered to be a death benefit pension in that surviving spouse’s name.
SuperConcepts general manager of technical services and education Peter Burgess said while the clarification provided by the ATO was certainly welcomed, it has also created some fresh questions in regard to the establishment of the new pension.
“The ATO article says to prevent further possible contraventions, one option would be to immediately cash the death benefit in the form of a new retirement phase income stream,” Mr Burgess said.
“However, it’s not clear in the article whether this would require the tax components of the original death benefit pension to be recalculated at that time.”
Mr Burgess said the term “new retirement phase income stream” seems to imply that it would, which then raises another question about whether or not the new pension loses its status as a death benefit pension.
“If it does, then any future payments from this pension would not be entitled to the concessional tax treatment afforded to death benefit pensions,” he explained.
“We might be reading too much into this, but the option of rolling over the interest to another fund for immediate cashing makes specific reference to the term ‘death benefit income stream’ while the option of commencing a new pension in the fund just refers to the term ‘retirement phase income stream’.”
SMSF Alliance principal David Busoli also agreed that the guidance misses a couple of important items.
“[For example], pension minimum requirements in the year of death are only applied to reversionary pensions. Non-reversionary pensions are exempt from the minimum pension requirements,” Mr Busoli clarified.
“Also, in the year of death, the reversionary pension minimum does not alter. The minimum is recalculated based on the reversionary beneficiary’s age in the next year.”
Although the ATO’s article does not contradict this, Mr Busoli said its failure to mention it could be misleading.
Thankyou Dana for clarifying this. So to be clear, the ATO’s view that a minimum pension is NOT required for a death benefit pension still stands?
It is well understood that a reversionary pension continues and the minimum is required and that all other pensions cease and the trustees pays the death benefit accordingly etc.
Can you now clarify that the deceased’s pension on cashing does not form a part of the accumulation balance of the other members? And, therefore, if a death benefit is started, the tax components will be in accordance with the deceased pension capital components, as assessed on the date of cashing
It is great to see the ATO jumping in here and providing their views. Importantly I would like to see ATO clarification on the requirement that a deceased member’s superannuation benefit be cashed as soon as possible. What does that mean in terms of time frame? We have all seen a deceased member’s superannuation benefits lie in wait for two years or more while the Trustee decided what to do. Formal guidance would help on the duration to pay out the SMSF estate. While we are there most deeds see membership ceasing on death, so where is the deceased’s superannuation benefits held – in a suspense account? Is it entitled to any earnings on the underlying benefits? It seems to me that if we are looking at the retirement income system as a whole, legal clarification on “as soon as possible” and the accounting and tax requirements on that is absolutely essential.
To be fair, the ATO’s guidance applies to both reversionary and non-reversionary pensions as the guidance is not just in relation to death benefit pension commencement in the year of death but also future years post commencement.
It will be great if the ATO can comment on whether recommencement of death benefit pensions are contaminated with accumulation tax components, what happens to earnings and tax components while the death benefit pension doesn’t meet the minimum standards etc
David is correct that the new guidance only relates to reversionary pensions. Our web guidance is in the process of being updated. The previous webguidance on non-reversionary pensions stands.