In an online article, SuperConcepts executive manager, SMSF technical and private wealth, Graeme Colley said that receiving an audit report for a breach of the superannuation standards can be very upsetting in an already upsetting time, so it is very important that the right processes are followed to reduce the risk of this occurring.
Mr Colley explained that 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,” Mr Colley said.
“For lump sums, the payment can be made as one amount or as an interim lump sum plus a final lump sum.”
Where it can become challenging, he cautioned, is that under section 58 of the SIS Act, it is possible for the deceased member to direct the trustee 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,” Mr Colley said.
As an example, Mr Colley said 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,” he warned.
With auditors paying greater attention to funds complying with the legislation, Mr Colley said there are 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,” he said.
“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.”
Mr Colley said he would like 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,” he noted.
“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, Mr Colley said 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,” he reminded advisers.
“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.”
Mr Colley said the payment of superannuation death benefits is in need of 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,” he said.
The important point is that the law says a death benefit must be paid as soon as practicable. The bit about six months is a general view based on the premise that if a death benefit cannot be paid within, say six months, then there needs to be a good reason why not as there could be liquidity concerns.
The other issue is that the person that becomes the trustee is not experienced as a smsf trustee. They don’t know these rules and even if they get some advice from you re the process they sometimes just start paying out amounts to beneficiaries in several payments before you have even received the documents !
Another example of the world gone mad with such a technical position (which I personally don’t agree with). This could not have been the intention of the legislators, surely. The ATO should issue a statement that in their administration of the rules, the trustees could determine an interim lump sum amount (to be satisifed by the payment of cash and in specie transfer of the determined assets) and when final lump sum amount determined, this could also be satisfied by a payment of cash and in specie asset transfer ( if desired).
It shouldn’t be that hard. For the sake of clarity and sanity, c’mon ATO.
The multiple lump sum is a key problem. With unlisted assets you are sometimes forced to transfer and have no option of cashing the asset. 6 months is also too short as a default. Probate is often 3-4 months. Needs to be one year and remove the idea that only two transfers are allowed, needs to be unlimited in number within acceptable time frames.
Until you have been though a few of these it’s hard to comprehend how difficult it van be at times and making things too tight means you will have to “have an excuse” almost every time. This is clearly too restrictive.
I haven’t had the problem yet of direct real estate,