“The practical application of such a short time frame was almost impossible to achieve, setting trustees up for consistent failure at a time of profound grief.”

She said that despite trustees and family members of the deceased having to deal with myriad other things such as funeral arrangements, financial institutions and Centrelink, it was also expected that they turn their attention to the SMSF, liquidate the deceased member’s assets, and pay them to their beneficiaries within six months.

“Considering that obtaining the grant of probate could take anywhere from six to 12 months, it was unlikely to be accomplished within a shorter time frame,” Banton said.

“Where there was an absence of documentation citing why the delay exceeded six months, it meant that SMSF auditors technically had no discretion but to qualify their audit report for breach of the payment standards.”

She added that SMSF auditors typically provided a slightly longer lead time to pay death benefits, understanding that grief does not have a fixed time frame.

However, the ATO has now replaced QC 42934 with QC 45254, withdrawing its six-month definition of “as soon as practicable”, providing significant relief for grieving trustees and offering much-needed flexibility when they require it most.

“The update also aligns with the tax provisions repealed on 1 July 2017, allowing trustees to approach the distribution of death benefits with the time and attention required without the pressure of an unrealistic deadline,” Banton said.

“One reason why the six-month definition was in place is that SMSFs can continue to claim exempt current pension income (ECPI) when the deceased member is in pension phase.”

Banton said the ATO tried to limit the time frame because the fund could continue to claim ECPI indefinitely.

“While the six-month definition is not enshrined in SIS law or the Tax Act, how long is too long for an SMSF to benefit from claiming ECPI? What about illiquid assets?” she said.

“While it may take more time to sell some assets because there is no ready market, should SMSF trustees be allowed to take as long as they like to sell assets because the market is not paying the price they want? It would be unrealistic to expect an SMSF auditor or the ATO to accept this as a reasonable excuse for such a delay.”

Furthermore, Banton said that regulation 6.21 of the SISR still states that “a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies”.

“In most cases, this would occur within six to 12 months of the member’s death, ensuring that all legal requirements have been adequately addressed,” she said.

“It would be advisable to document any reasons for delays beyond this period to ensure that the fund’s SMSF auditor and the ATO are aware of the circumstances affecting the trustee’s ability to meet their responsibilities and obligations.”

She concluded that while the ATO has provided SMSFs with a long-awaited, realistic approach, it is now up to trustees to responsibly manage fund assets during this transitional period.