Common issue flagged with triggering benefits before death
SMSFs have been warned that simply signing a resolution to say that a member benefit will be paid before death without an actual payment being made will not be sufficient for treating the payment as a member benefit.
Cooper Grace Ward Lawyers partner Clinton Jackson said, for some clients, paying benefits out of super prior to death so that it is a member benefit, rather than death benefit, can work as a good strategy.
“Unfortunately, for some people, death does have a time frame for them, and when we know that, we are able to take that money out of super prior to death so that we get a better tax result,” Mr Jackson explained.
He gave an example of a 65-year-old who wants to leave their superannuation money to their non-dependant adult children.
“If we were to pay them a death benefit, there would be at least 15 per cent tax on the taxable component. If there was insurance, hopefully not at that age, there would be more tax on that plus possibly the Medicare levy,” he said.
“Whereas if the 65-year-old took it all out and paid it to themselves, it would be a benefit to them, there would be no tax and it would be a much better result, particularly for some of our older clients because they do have fairly significant taxable components.”
Mr Jackson said there is an issue, however, with people resolving to pay the benefit prior to death to the member themselves, without actually making the payment.
“This tends to be a common problem, because what people do is they rush around and sign a resolution and think they’ve done enough. Realistically, we need to see more than that for it to be treated as a member benefit,” he cautioned.
“We can’t just have one flimsy bit of paper and say that the member benefit has been paid.”
In order for the payment to be treated as a member benefit, Mr Jackson said it must be “paid before death, not merely triggered”.
“Now we have some private binding rulings on that, and often we can get a really good result, provided people do the right thing, but it’s not enough the moment before death to sign a bit of paper and believe it’s all good,” he warned.
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 has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.