SMSFs cautioned on death benefit compliance trap

“Under regulation 6.21, a death benefit has to be cashed as soon as practicable, and it has to be cashed as a pension, a lump sum or a combination of both.

“The ATO as far as I’m aware until recently did not have a firm view of what cashed meant,” said Ms James.

Ms James said as a result, it’s been unclear whether it would be sufficient to commence a pension and cash the death benefit, pay a pension for a week at the pro-rata minimum and then commute it and put it back into accumulation phase.

“With the $1.6 million cap, and the money needing to come out on death, this issue became more important for the ATO to form a view on. The ATO came out and said our interpretation of the law is that cashing is an ongoing state of affairs; you need to commute an amount either to another pension or as a lump sum — you can’t just retain that amount in accumulation phase without contravening payments under the super law,” she said.

“That created some issues. There have been some divergent views historically. So the ATO has put out a practical compliance guide 2017/6, to try and address this issue. So, what they’ve said is where you satisfy certain conditions we won’t apply compliance resources to this issue.”

The Commissioner stated that the ATO will not apply compliance resources to review whether a trustee has complied with the compulsory cashing requirements provided the:

• Member was the deceased member’s spouse
• Commutation and rollover of death benefit was made before 1 July 2017
• Benefit was paid from commutation of income stream that satisfies s307-5(3) (repealed). I.e. the payment was made from the latest of six months from date of death or three months from grant of probate/administration.

Ms James said the level of protection offered by PCG 2017/6 is uncertain, however.

“The ATO have said they won’t apply compliance resources, but what does that mean? It means they won’t actively come looking for you for this specific issue. But what happens if they come across it?” she queried.

“If you were to apply for a private binding ruling, they would apply the rule as per their interpretation, so there’s not protection there. They would tell you that those death benefits need to come out as a lump sum or as a pension — you can’t just put it in the accumulation phase.”

Ms James said if there was an audit on the fund by the ATO, for example, the ATO may potentially just apply the law based on their interpretation.

“They’ve said that they won’t go looking for you. But what if they do find it? Would it matter if the fund was otherwise a clean and complying fund or would it be different if it was a fund that had early release, loans to members, in house assets, the trifecta of big issues the ATO is always looking for across SMSFs?” she said.

“So I think the key takeaway, is that yes it’s an option available to clients, but they should make sure they satisfy the requirements and consider how the benefits will be taxed going forward, what records they retain and make sure that they fully understand that this is not just a green light, it’s amber light.”