This is of particular concern where the asset is carrying a large capital gain and is of significant value, is the main asset of the SMSF and has very little liquidity, and the recipient is not a death benefit dependant of the deceased member.

“[The transfer of lump sum benefits] is reflected under reg 6.01 of the Superannuation Industry Supervision Regulations 1994, which defines a ‘lump sum’, for the purposes of the payment standards to include an asset,” Briglia said.

“Therefore, if a member wishes to direct a particular asset of the SMSF to be transferred to a specific beneficiary on their death, they can do so via a BDBN. This might be considered where, for example, the asset is used in the family business, and the member wants to direct the asset to an adult child who is closely involved in the family business.”

However, there are potential tax implications, she said, which should be considered beforehand, such as those which may arise where a BDBN directs SMSF death benefit payment of a large commercial property in specie.

Briglia gave an example of Liane, who is the sole member of an SMSF, the main asset of which is a commercial property valued at approximately $5,000,000 that it has held for many years, and has a cost base of $1,000,000.

“The property is leased to a related family business at commercial rates. Liane is in receipt of an account-based pension from the SMSF ($2,000,000). The SMSF has a small amount of cash, but due to the ‘lumpy’ asset mix of the SMSF, the accountants are having trouble ensuring the rent flowing from the property is enough to satisfy Liane’s minimum pension payments, as well as maintaining some liquidity in the SMSF,” Briglia said.

“Liane wants the property to stay in the family upon her death and makes a BDBN directing her death benefits in the fund to be paid to her adult daughter, Wendy, to be satisfied by way of in specie transfer of the property. Upon her passing, the total balance in Liane’s SMSF was $5,100,000, being represented by the value of the property plus $100,000 cash. Her super (both pension and accumulation) is 50 per cent taxable and 50 per cent tax-free component.”

Briglia continued that as Wendy is not a death benefit dependant, the SMSF trustee must withhold death benefit tax at a rate of 17 per cent (including Medicare levy) on the taxable component of Liane’s death benefits.

“Based on a balance of $5,100,000, 50 per cent of this will be a taxable component ($2,550,000), meaning the SMSF trustee must withhold $433,500 tax on the death benefit payment,” she said.

“A CGT event occurs for the SMSF when transferring the property to Wendy, as there is a change in the beneficial and legal ownership of the asset. As the property was not wholly supporting the payment of Liane’s pension, part of the net capital gain on transfer will be included in the SMSF’s assessable income for the year.”

Briglia said the assuming there are no capital losses, deductions, or franking credits, the calculations would be:

SMSF is 39.2 per cent in pension phase

$5,000,000 – cost base of $1,000,000 = $4,000,000 capital gain

Apply general 1/3 CGT discount: $4,000,000 x 1/3 = $1,333,333.33

$4,000,000 - $1,333,333.33 = $2,666,666.67

The non-exempt proportion (100 per cent - 39.2 per cent = 60.8 per cent) of the SMSF’s net capital gain included in the SMSF’s assessable income: $2,666,666.67 x 60.8 = $1,621,333.34.

“The $1,621,333.34 of statutory income from the transfer of the property will be included in the SMSF’s assessable income and taxed at the usual 15 per cent rate of tax. This results in a tax liability on the transfer of the property of $1,621,333.34 x 15 per cent, which is $243,200.”

“Stamp duty may also be payable by the transferee (exemption may be available depending on the jurisdiction). The SMSF trustee therefore has a withholding tax liability of $433,500 and a CGT liability of $243,200 in relation to the payment of the in-specie death benefit. The SMSF may also have other income tax liabilities, such as from earnings on assets in accumulation phase. However, as the property was the main asset of the SMSF, the only assets remaining are approximately $100,000 in cash.”

She continued that this places the SMSF trustee in an impossible position as it is obligated to transfer the property to Wendy, but to do so will result in a tax obligation of $676,700 plus other administrative costs.

“Given the SMSF doesn’t have sufficient funds to pay such tax, it effectively cannot comply with its obligations under the BDBN.”

However, she said, there are some possible solutions, one of which is for Wendy to disclaim the benefit under the BDBN, and the SMSF trustee can exercise its discretion as to how to pay Liane’s death benefits, including the form of the death benefits.

“For example, the property could then be sold, and the net proceeds after payment of taxes and administrative costs could be paid to Wendy.”

“Alternatively, the SMSF trustee could seek a direction from the Supreme Court that the trustee could satisfy its obligation to transfer the property partly by way of in-specie and partly by way of sale to Wendy so as to give the SMSF sufficient funds to pay its liabilities.”

Briglia continued that, additionally, before her death, Liane could explore options for keeping the property in the family while smoothing the tax impacts.

“For example, Wendy and others in the family could be admitted as members to the SMSF, and their contributions could be used to add liquidity.”

“This liquidity could then be used to pay out Wendy’s death benefits instead of transferring the property in which case, the immediate CGT impact would be minimised, or to pay the SMSF’s tax liabilities on transfer of the property as an in-specie death benefit.

“Or Liane could take the property out of her super fund before death and bequeath it to Wendy under her will. This would avoid the withholding tax, but the SMSF would still require funds to pay the CGT. This could be achieved, for example, by turning off or turning down the pension.”