Late last week, the ATO updated its guidance on paying superannuation death benefits in QC 45454 to explain when a benefit is a death benefit or a member benefit.
The updated guidance provides examples to explain in what circumstances a benefit will be a member benefit or a death benefit where a member has requested an amount to be paid from their fund before they died but died before they received it.
The guidance emphasises the importance of factors such as whether the trustee was aware that the member had died and whether the money was paid to the account of the member or their legal personal representative.
Commenting on the recent guidance, SMSF Alliance principal David Busoli said the updates to QC 45254 do nothing to enhance certainty or “provide a basis for practical, uncontentious outcomes”.
“Essentially the release indicates that the benefit will be paid as a member benefit if the trustee does not know the member has died, and a death benefit if they do. The tax differences can be considerable,” said Mr Busoli.
He noted a number of private binding ruling on the matter in the past few years have determined that the benefit in these sorts of circumstances will be a member withdrawal, not a death benefit, irrespective of the trustee’s knowledge of the member’s death.
“The trustee’s knowledge of the death did not even rate a mention [in the private binding rulings].”
Mr Busoli said the superannuation industry was expecting a simple determination from the ATO, “one way or the other.”
“Even the example raises doubt as it states that “the trustee of the SMSF knew Jack had passed away before authorising the payment”. Does this mean that, if the payment had been authorised before the member had passed, it would have been a member withdrawal?” he questioned.
“This determination is not fit for purpose and needs replacing.”
The ATO had previously reached a settled position that it should be treated as a member benefit and issued a number of private binding rulings last year supporting this view.
Accurium head of education Mark Ellem said this latest update now appears to contradict the settled position that was reached by the ATO last year.
Mr Ellem said being aware of whether the member has died or not appears to be a new and vitally important consideration.
“It would be interesting for the ATO to apply this new approach to all of the previously determined PBRs to see if the outcome would still be the same,” he stated.
Mr Ellem said until there is more definitive guidance that can be relied upon confidence such as an ATO ruling, rather than an update on a webpage, it “would be prudent to consider either obtaining specialist legal advice or applying for a PBR, as suggested by the ATO, in relation to a superannuation fund benefit payment in these circumstances”.
The website guidance cannot be relied on and should be disregarded (in my view). Requiring a SMSF to request PBR for the answer is not the way the law, and the Regulator providing guidance on it, should work.
In any event, the classification shouldn’t hinge on the trustee’s knowledge of the person’ death, it should (and likely does) hinge on the trustee resolving to pay a member benefit as requested. If the trustee has not resolved to make the requested payment prior to death, the example in the website guidance is probably (partially) correct, the trustee should resolve to disregard the request and then decide the death benefit payment destination.
A member benefit request that has been authorised to be paid should retain its identity as a member benefit even if delayed in the payment process.