Death benefit rules ‘due for an overhaul’
With the existing legislation around the payment of lump-sum death benefits leading to inadvertent breaches by SMSFs, a technical expert says a more practical approach is needed in this area.
In an online article, SuperConcepts executive manager, SMSF technical and private wealth, Graeme Colley said that receiving an audit report for a breach of the superannuation standards can be very upsetting in an already upsetting time, so it is very important that the right processes are followed to reduce the risk of this occurring.
Mr Colley explained that regulation 6.21 of the SIS Regulations makes it difficult for the trustee of an SMSF to pay lump sums and be compliant at the same time.
“This regulation states that on a member’s death, a compulsory condition of release has taken place which requires benefits to be paid as lump sums and/or a pension,” Mr Colley said.
“For lump sums, the payment can be made as one amount or as an interim lump sum plus a final lump sum.”
Where it can become challenging, he cautioned, is that under section 58 of the SIS Act, it is possible for the deceased member to direct the trustee to transfer parcels of shares or other fund investments to the beneficiary or their legal personal representative — and the trustee is required to comply with the direction.
“Each cash payment, investment or parcel of investments, such as company shares, that are transferred are required to be treated as a separate lump sum,” Mr Colley said.
As an example, Mr Colley said a member may have directed the trustee to transfer certain investments in-specie other than in cash to the beneficiary or the trustee may have exercised their prerogative and transferred some fund assets to a beneficiary or the deceased member’s estate.
“If the death benefit consists of more than two lump sums such as a couple of cash payments and the transfer of a number of investments, then the requirements of regulation 6.21 would be breached,” he warned.
With auditors paying greater attention to funds complying with the legislation, Mr Colley said there are many more issues being raised with trustees.
“In some situations where trustees and their advisers are conscientiously sticking to the rules, they end up with solutions that weasel around the law to comply with the payment of death benefit lump sums,” he said.
“This is being done by death benefit pensions commencing and making a number of lump-sum commutations. The only trap here is that commencement of the death benefit pension may run into trouble with transfer balance cap issues.”
Mr Colley said he would like to see a practical approach provided in the legislation for the compulsory payment of lump-sum death benefits to take multiple lump sums into account.
“This would be preferable to forcing trustees to fall back on an artificial solution such as multiple lump-sum commutations of death benefit pensions,” he noted.
“For integrity purposes, maybe the legislation could be amended so that a time limit be placed on death benefit lump sums subsequent to the member’s death.”
As a guide, Mr Colley said it is generally accepted in the industry that a period of six months after the member’s death is reasonable to pay lump sums or commence pensions and meet the requirement in regulation 6.21 that the death benefit has been “paid as soon as practicable”.
“If the benefit cannot be paid within six months, then late payment of the benefit needs to be supported by providing a reasonable excuse,” he reminded advisers.
“The delay on the basis of a reasonable excuse could be due to challenges to the benefit payment, the appointment of a legal personal representative or other significant reasons.”
Mr Colley said the payment of superannuation death benefits is in need of an overhaul because of the manner in which lump sums can be paid from the fund.
“A change which would result in multiple lump sums being paid within a set period would overcome the technical traps that now exist and inadvertently lead to breaches of the SIS regulations,” he said.
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.