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ATO position ‘has litigation written all over it’

ATO
By Philip King
21 April 2022 — 2 minute read

The status of benefits paid to a member after death remains problematic, hears SMSF conference. 

An ATO decision over whether benefits paid after the death of an SMSF member are classified as member benefits or death benefits will come to a head in legal action, warned the SMSF Association (SMSFA).

The deputy chief executive of the SMSFA, Peter Burgess, said that despite the ATO’s ruling, problems remained with the long-running issue.

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“[This] relates to situations where a superannuation member has requested their benefits, but then they die before the benefit is paid,” he told the opening session of the SMSFA annual conference in Adelaide yesterday (20 April). “Unfortunately, this seems to be a very common scenario.

“Is it a death benefit or a member benefit? And why does it matter?”

He said the definition was crucial because it directly impacted where the money went and whether tax was payable.

“If it’s a member benefit, then binding death benefit nominations have no claim – it’s a member benefit that’s paid to the estate.

“So the trustee has no claim on where the money is paid. And also if the deceased was over 60, it’s tax-free.

“But if it’s a death benefit, then binding death nominations come into play, and if it’s paid to a non-tax dependent, it’s subject to tax.”

He said that over the past decade, the ATO had issued plenty of private binding rulings but it had changed its tune more than once.

“In the early days back in 2011, they concluded that it was a death benefit, then we saw a series of binding nominations in 2018, 19, 20, 21, when they concluded it was a member benefit,” Mr Burgess said.

“But then last year they issued another one where they concluded it was a death benefit … and they have confirmed to us that they do have settled position on this – it should be treated as a member benefit.”

Mr Burgess said that was a practical outcome for APRA funds because they would not always be aware that someone had died and simply pay the benefit.

But it did not solve potential problems for an SMSF.

“If I am nominated beneficiary of a binding death benefit nomination and the trustees in the self-managed super fund pay it out as a member benefit, knowing full well that the member has died, I’m not going to be very happy,” Mr Burgess said.

“So this has got litigation, I think, written all over. We won’t know until we have a court case whether the ATO’s position will hold as to whether the beneficiary nominated under the binding death benefit nomination has a case.

“We won’t know until it’s tested in a court of law.”

Mr Burgess also raised another problem with the temporary reduction in minimum pension drawdown rates, which was extended in the recent budget for the fourth year in a row.

The move halves the minimum pension amount to prevent retirees from having to sell assets to meet a higher requirement, but it just saved up a political problem.

“Therein lies a problem for the government – this is well accepted in the community now. It’s not going to be easy decision to restore them to back to their normal rates,” Mr Burgess said.

He said it might need a review by a future government to resolve.

ATO position ‘has litigation written all over it’
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