Taking action on the relief for death benefit pensions

PCG 2017/6 provides a qualified degree of relief in relation to the ATO’s enforcement of its strict view of the compulsory cashing requirement in reg 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) which broadly prevents retention of commuted amounts from death benefit pensions within super. More specifically, subject to certain prescribed requirements, PCG 2017/6 provides a concession in relation to the ATO dedicating active compliance resources against surviving spouses who commute their death benefit pension(s) and roll back the commuted amount into accumulation phase prior to 1 July 2017 to stay within the transfer balance cap, rather than cashing the commuted amount as a lump sum payment.

The requirements

The ATO state (PCG 2017/6/16):

The commissioner will not apply compliance resources to review whether a SMSF has complied with the compulsory cashing requirements relating to a death benefit as set out in regulation 6.21 of the SISR provided that:

• the member of the SMSF was the spouse of the deceased on the deceased’s date of death; and
• the commutation and rollover of the death benefit income stream is made before 1 July 2017; and
• the superannuation lump sum paid from the commutation is a member benefit for income tax purposes because it meets the requirement of subsection 307-5(3).

As can be seen from the above, the concession is limited to surviving spouses who commute their death benefit pension prior to 1 July 2017.

Additionally, it should be noted that the timing requirements in s 307-5(3) of the Income Tax Assessment Act 1997 (Cth) (repealed with effect from 1 July 2017) mean that the relief will not be available for very recent death benefit pensions as the benefits may not qualify a member benefit. Broadly, a death benefit pension generally converts to a member benefit after the later of 6 months of death or 3 months of probate.

The ATO’s view on compulsory cashing

Under reg 6.21 of the SISR, death is a compulsory cashing event. This means that a deceased member’s benefits must be cashed as soon as practicable after the member dies.

Where fund trustees are cashing a death benefit by way of a lump sum payment (including an interim and final lump sum payment), satisfying this cashing requirement is not likely to be especially contentious except where there are significant delays in paying the lump sum(s). However, the question must be asked what do the compulsory cashing rules require in respect of death benefit pensions?

The ATO state their current view in law companion guideline LCG 2017/3 which provides ([61]-[63]):

1. Where the superannuation provider cashes a deceased member’s superannuation interest to a beneficiary as a superannuation income stream (death benefit income stream) then the compulsory cashing requirement is met as long as the superannuation income stream continues to be paid and continues to be in the retirement phase.
2. A superannuation provider will not have fully met their obligations under the compulsory cashing requirements until all of the deceased member’s superannuation interest has been paid out of the superannuation system.
3. Broadly, in the case of a death benefit income stream this will be when the superannuation interest supporting the death benefit income stream is exhausted or the dependant beneficiary commutes the death benefit income stream in full and the resulting superannuation lump sum is paid out of the superannuation system to the dependant beneficiary.

It should be noted that the ATO’s view of reg 6.21 has not yet been tested in the courts, and the wording of reg 6.21 of the SISR does not clearly articulate the purported requirement that death benefit pensions must be paid continuously as pensions until they are exhausted or otherwise leave the superannuation system as a lump sum.

Conclusions

Subject to the prescribed requirements, PCG 2017/6 provides welcome relief for surviving spouses who intend to commute their death benefit pension(s) and roll back the commuted amount into accumulation phase prior to 1 July 2017 (e.g. to stay within the $1.6 million transfer balance cap). Note, that the relief is qualified relief as it does not preclude the ATO taking compliance action. Expert advice should therefore be obtained before relying on PCG 2017/6 to ensure you are fully aware of the potential advantages and disadvantages of relying on the ATO’s guidelines. Further, those who are not covered by the relief should seek legal advice.

By William Fettes, senior associate; and Daniel Butler, director, DBA Lawyers