Death benefits v member benefits is all in the timing: legal expert
Leaving superannuation in the superannuation environment for as long as possible is likely to produce a more tax effective outcome for clients, says an SMSF legal specialist.
Scott Hay-Bartlem, partner at Cooper Grace Ward Lawyers, said at the firm’s recent Advisers’ Conference that the ATO now treats payments made after a member’s death as death benefits, not member benefits and several private binding rulings over the past 18 months have reinforced that position.
“The ATO has changed its view regarding how the distinction between death benefits and member benefits is applied in certain circumstances,” he said.
Hay-Bartlem said if a member withdraws a benefit before their death, and they’re over the age of 60, retired or ceased an employment arrangement, they can access their superannuation tax-free.
However, if the benefit is a death benefit the tax treatment is different, and depending on the circumstances associated with the member and the person who receives the benefit, the tax payable can be from 0-30 per cent.
“There's been a lot of commentary and conjecture in our profession over the treatment and the distinction between member benefits and death benefits and which strategies can be applied for people to maximise the amount they have in superannuation up until their death and then pull it out shortly before they pass away to minimise the consequences in the impact of death benefit tax,” he said.
Hay-Bartlem said the ATO view was that where the benefit was commenced to be paid and a member made a request before passing away, even if the benefit was paid after death, if the circumstances were such that the member did everything that they could to cause their member benefits to leave the fund, the ATO was willing to accept that payment.
“However, the ATO has now flipped that position and changed it quite substantially,” he said.
“The ATO now states that if a trustee is aware that the member has passed away, even though the request has been made, and the trustee is making the payment, it will now treat that as a death benefit as compared to a member benefit.”
In an SMSF environment, Hay-Bartlem said there are member representation rules and often there is a family component of the fund that involves the mother, father and children.
“They will know if the spouse has passed away and, in most circumstances, the change in the ATO view is going to mean that these payments made even shortly after death, whether a request is made prior to death, are going to be treated as death benefit payments,” he said.
However, he said delays in when a payment leaves the fund can mean that the ATO takes a different position and treats it as a member benefit.
“Knowledge is really the key differentiator. If the trustee becomes aware that the member has passed away and subsequently makes the payment, the ATO will basically say no, it's a death benefit,” he said.
“The private binding rulings that have occurred in the last 18 months are really evident of that. The process to implement this type of payment shortly prior to death takes longer than anticipated and the consequences for our clients and for the members can be quite severe.”
