ATO’s death benefit pension guidance sparks new questions
While the ATO provided welcome clarification on death benefit pensions last week, certain aspects of the guidance, such as whether tax components need to be recalculated, are unclear, says a technical expert.
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.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
