Benefit cashing rule causing confusion
A recent ruling from the ATO around the treatment of death benefits has been causing confusion for trustees that are commuting lump sums from a death benefit pension following the early death of a spouse, according to Colonial First State (CFS).
Addressing SMSF Adviser’s SMSF Summit 2019 in Perth last week, CFS executive manager Craig Day said the ATO had recently confirmed if a death benefit pension failed the minimum pension standards, the member could restart the pension rather than taking it as a lump sum, but any pension payments taken before the pension failure would be retrospectively viewed as lump sums.
“Issues have started to come up with the SMSF Association interpreting the ATO clarification as potentially meaning the death benefit cashing rules may continue to apply to any partial lump sum withdrawals taken from any death benefit pension - even where the pension had continued to satisfy the pension standards. The reason this causes a problem is that those cashing rules only allow a death benefit to be paid as a single lump sum or as interim and final lump sums”, Mr Day said.
Mr Day said this view had caused confusion for SMSF trustees below age 60 whose spouse had died before age 60 and who may be implementing a strategy where they took additional lump sum commutations on top of their pension payments to improve the tax treatment of their death benefit.
“For clients with existing death benefit pensions, if they’re taking more than the minimum and the pension payments are included in their assessable income, what you can do is reduce their pension back to the minimum and anything over and above that you take as a lump sum commutation to get zero tax treatment and a debit out of their transfer balance account,” he said.
“However if the view that the death benefit cashing rules applies to those lump sums is correct, a surviving spouse will be limited to a maximum of two partial commutations only. This would obviously impact a member's ability to draw any payments in a way that best suits them and would also have implications for the administration of any super fund paying death benefit pensions.”
Mr Day said CFS had discussed this interpretation with the SMSFA.
"In our view the death benefit cashing rules should not apply to any partial commutations from a death benefit pension so long as the pension continues to be paid. In this case, the commutations would arise due to a request by the spouse to partially commute their pension and not due to the death of the original member.
“The SMSF Association acknowledged this view and confirmed it was seeking guidance from the ATO. At this stage we are hopeful of a positive response”, Mr Day said.