Tim Miller, head of technical and education for Smarter SMSF, said the ATO has some commentary on its website about death benefit payouts, which lists a number of factors that it takes into consideration when determining whether something is a member or death benefit.

“I guess the caveat to all this is where generally a request is made before somebody passes, but due to variations of circumstances, the benefit isn't paid until after the person has passed, the ATO’s position historically has been for self-managed super funds has been that they are death benefits,” Miller said.

Dunn explained that the closely held nature of an SMSF is that the trustee will know that an individual has died, unlike an APRA fund where that is not always the case, but there are some more recent rulings dealing with SMSFs that have created “gray areas”.

“Interestingly, while knowledge was there in respect to this, we had to look outside of the box to understand why the ATO ultimately took the position it did and it very much demonstrated that it was outside of the control of the trustees in being able to make that payment in a timely fashion,” Dunn said.

Miller continued that the facts of the SMSF involved in one PBR were not “overly interesting”, other than there was the member who was also a director of the corporate trustee.

“There were multiple family members in the fund, and they were all directors of the corporate trustee, it wasn't just a single member fund. Importantly, they also had a look at the family trust, and a decision the member made while alive,” he said.

“[The PBR facts state] the SMSF had one significant investment in a private, unrelated entity, and the member made a decision to transfer the units from that to the family trust. As he had made a conditional release, so he was over 65, had unrestricted, non-preserved benefits, he went down the path of making benefit payment and transferring his units out of the fund.”

Miller said even though the member made a direction to the family trust, it's still a benefit to him in those circumstances. The request was made to the trustees of the fund who all agreed.

“They then approached the investment manager – the unrelated party – and went through the redemption process and this is where it became interesting, because the redemption process has effectively had an information memorandum as to how you went through any redemption,” Miller said.

“Federally, because these were unlisted investments, they went through quarterly valuations, and you have to put a request in 45 days prior to the next valuation date, so any request that was made less than that 45 days before the next valuation date would follow into the next quarter.”

He continued that the PBR facts indicate the investment company acknowledged the request and acknowledged the valuation date as the upcoming end of quarter date, and therefore also acknowledged the redemption date.

“Now interestingly, also in the information memorandum, once requested, only the investment manager could decide not to pay a benefit out. So effectively, once the ball was in motion, it couldn't be stopped. In the days prior to the redemption date, the member had passed away and while all parties knew, including the investment manager, the payment was in process, and the transfer was done,” he said.

“They asked the ATO whether it was a death benefit, or a member benefit, and ultimately, in this case, because of all of those circumstances, the ATO determined that it was a member benefit, because despite the knowledge that the member had passed away, the trustee was powerless to stop the payment and it was following this natural cause of the request the member made.”

Dunn said a common theme emerging in the treatment of SMSFs and death benefit payments falls back to whether the decision that happens at that point in time or happens next ultimately needs to be outside of the control of the trustee.

“In this instance, it was based upon the procedural aspects of the deed and the investment manager in determining the valuation to enable that benefit to occur,” he said.

Miller added that another interesting point to come out of this PBR deals with the contribution ruling, and the concept of beneficial versus legal ownership, which deals with the execution of off-market transfer forms.

“What was interesting in this case was that the unit trust transfer form, or the off-market transfer form, was executed on the initial date when the member signed it, and that would seem to be the date of the benefit payment,” he said.

“However, because of the information memorandum, the ruling was that the date of the payment was, in fact, the day after the valuation date, which is the redemption date based on the actual investment vehicle itself. It's really important, then, that people understand the process they're going through, if they're looking to do anything other than a cash payment, from a timing point of view, from an execution point of view.”