SMSFs cautioned on ‘antiquated rule’ with death benefit payments

“In other words, you’ve basically got a maximum of two lump sums per dependant or to the executor,” said Mr Fettes.

Mr Fettes said this could be a problem where clients want to pay multiple transfers of death benefits such as different tranches of shares, for example. 

He explained that based on the Commissioner’s view in ATO ID 2012/79, each tranche of shares is likely to be considered to be a separate lump sum being paid.

The ATO’s comments in ATO ID 2012/79 refer to the NSW Supreme Court decision in White v Shortall [2006].

“[In its decision], it was considered that a parcel of shares in the same company (where such shares are of the same class with identical rights attached) are fungible and are appropriately regarded as a homogenous collective, giving rise to a single chose in action or right,” he said.

“Shares in different companies, or shares in a single company that are of a different class, are attended by disparate legal and/or beneficial rights and therefore cannot be interchanged or substituted. Accordingly, such shares are not fungible and cannot be regarded as a homogenous collective.”

Mr Fettes said the ATO ID suggests that where there are different classes of shares and they’re sufficiently disparate in their nature, they have different legal and beneficial rights and so they’re not interchangeable.

“Similarly, shares in different companies are different, so I think the correct legal position is that if you have shares in CBA and shares in BHP and then a transfer from a super fund bank account going out, then even if it’s on the same day, you won’t be able to aggregate them as a single lump sum,” he explained.

While this particular ATO ID is in relation to contributions and focused on the construction of the contribution acceptance rules, which has changed considerably since 2012, this does seem to set out the Commissioner’s approach on this issue, he said.

Mr Fettes said the two-lump-sum standard is part of the payment standards, and while it may not attract a major administrative penalty, it could have potential implications for 304-10(1)(b)(ii) of the ITAA 1997.

This provision states that a superannuation benefit must be included as assessable income where a benefit has been received otherwise than in accordance with payment standards prescribed under subsection 31(1) of the Superannuation Industry (Supervision) Act 1993, he explained.

Mr Fettes noted that this provision is most commonly associated with bringing to tax withdrawn amounts where no condition of release has been met.

While it would be a “farcical outcome” for the major tax concessions that are intended to apply for spouses receiving death benefits to be completely overturned on the basis of the antiquated two-lump-sum rule, he said, SMSF clients should still make every effort to comply with that standard.

“That is the language of the assessment mechanism in 304-10. There’s also been a bit of movement in this space with the Commissioner releasing TD 2021/D6 and PS LA 2021/D3,” he cautioned.

“TD 2021/D6 sets out how the Commissioner would seek to apply relief under s 304-10(4), where the Commissioner is satisfied that it is unreasonable for an amount to be included in the assessable income under the main assessment mechanism.”

While there has not been an ATO focus in this area, SMSF auditors, he warned, will raise concerns where there are issues with paying the benefit as soon as practicable and the maximum two lump sums standard.

“The law really needs to be changed around the maximum two lump sum standard. It’s an antiquated rule that really makes no sense, but technically, it’s there,” he said.

“You don’t really want to be in this situation where you’re having to beg the Commissioner to exercise a discretion in relation to it being unreasonable to have that assessment mechanism apply because this is part of the payment standards.”

A potential way of handling the payment of multiple tranches without breaching the two-lump-sum rule, he said, could be to affect the different payments under one instrument called a declaration of bare trust.

Under a declaration of bare trust, the trustee holds the assets on trust for the beneficiary absolutely, he explained.