SMSF property damage will cause death benefit complications
Damage to SMSF-owned properties as a result of Australia’s bushfire crisis may cause problems for funds looking to pay out death benefits in the 2020 financial year, according to SMSF Alliance.
The SMSF administrator’s principal, David Busoli, told SMSF Adviser that trustees whose properties had been damaged or destroyed as a result of the fires would need to consider how they would fund any potential death benefit payments during the period where repairs or rebuilding needed to take place.
“You can delay the payment of the death benefit for the death benefit period and that is regarded as being six months, but where you’ve got circumstances which would require a longer period, you can often have one, and I wouldn’t see the ATO having an issue with that,” Mr Busoli said.
“The benefit can also be paid out in two payments, so there is nothing to stop you from making an initial payment of the rest of the funds, and subsequently making a payment depending on the property value [once it’s rebuilt].”
In an email to clients on Tuesday, Mr Busoli pointed out that trustees could not rely on a property valuation made before fire damage in calculating a death benefit, and would generally need to wait until the property was rebuilt to obtain an accurate valuation, which could take months or years depending on the insurance claims process.
“You may choose to pay the property out for whatever it happens to be at the time based on the best valuation you can achieve for what is basically a vacant site and an insurance policy,” he said.
“An auditor will regard the value of a destroyed property as being equivalent to the value of the land plus the replacement value of the insurance policy, and that may be acceptable to the beneficiary as a payout.
“The complications will be different depending on the circumstances of the beneficiary involved, because if it’s a husband and wife situation where one has passed on and the money stays in the fund, it’s not a big problem, but it’s where you’ve got a payout to other beneficiaries that it becomes an issue.”
Mr Busoli said complications could also ensue for beneficiaries who opted not to rebuild the relevant property, as this could have implications for any potential benefit payout.
“If the beneficiaries decide they don’t want to rebuild in that particular position, they will need the agreement of the insurance company — they might be forced to act in certain ways because the life insurance company might dictate it in order to get paid,” he said.
“A replacement value sum insured requires the property to be rebuilt, and if it’s not, you might have the claim reduced to indemnity value, but that will depend on the particular policy and particular situation.”