Death of an SMSF member: the compliance obligations

1. Effect on SMSF trusteeship

Generally, a member of an SMSF is also a trustee of the SMSF or director of the corporate trustee of the SMSF. Consequently, the death of a member will commonly affect the trusteeship of the fund and require the SMSF to comply with the relevant superannuation law rules within the prescribed period.

Superannuation law allows for the Legal Personal Representative (LPR) of a deceased member to be appointed as either trustee or director of the corporate trustee, as the case may. There is still a misconception that the LRP of a deceased member automatically becomes the trustee/director upon the member’s death. This is not the case  – refer to Ioppolo v Conti [2015] WASCA 45) – unless the trust deed provides a reason why it’s important to review the fund’s trust deed. The law merely allows the LPR to be appointed, however, you need to follow the appointment rules as set down in the fund’s trust deed and where the trustee is a company, refer to the company’s Constitution for the rules governing appointment of a director.

It’s also important to note the LPR rule ceases once the death benefit commences to be paid. This means once the first death benefit payment has been made or a death benefit pension has commenced, the trusteeship of the SMSF may have to be changed, within the permitted time period, to comply with the basic condition rules.

Once the LPR rule for the SMSF definition ceases and it does not meet the requirements of being an SMSF, the fund will have six months to take the necessary action to comply with the SMSF definition rules in section 17A of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

One appointed as either an individual trustee or director of the corporate trustee, the LPR is appointed in their own right and not as a representative of the deceased member. However, once the death benefit becomes payable and the LPR exception rule no longer applies, there is no automatic removal of the LPR as trustee or director, unless the trust deed or company constitution prescribes. Consequently, the LPR must be removed as trustee or director in accordance with the fund’s trust deed and/or company constitution and the trusteeship of the fund structured to comply, both within the six month period of grace provided in sub-section 17A(4) of the SIS Act.

Where a member’s LPR is already a trustee of the SMSF or director of the corporate trustee, they are not required to be appointed again. For example, Homer and Marge are both members and directors of the corporate trustee of the Springfield SMSF. They are also named Executors under each other’s respective will. Upon Homer’s death, Marge as Homer’s LPR is permitted to be a director of the SMSF’s corporate trustee, however, as she is an existing director, she is not required to be appointed again.

Once Homer’s death benefit commences to be paid the LPR rule no longer applies and the SMSF will have six months to restructure the trusteeship to comply with section 17A of the SIS Act. However, given Marge is the sole member of the fund and the sole director of the SMSF’s corporate trustee, the SMSF immediately complies with the SMSF definition and no compliance action is required. One of the many reasons why a corporate trustee is a must for an SMSF.

2. Form of cashing a death benefit

The superannuation law permits a deceased member’s benefits to be cashed in any one or more of the following forms:

• In respect of each person to whom benefits are cashed:
• A single lump sum; or
• An interim lump sum and a final lump sum.
• One or more pensions or the purchase of one or more annuities, payable to an eligible recipient

In relation to death benefits being cashed as a lump sum, it is often forgotten that it is restricted to an interim and final lump sum payment. However, this applies to each person to whom benefits are cashed. For example, if there were three persons to whom the deceased member’s benefit were to be paid, this would allow an interim and final benefit payment for each person. Where the deceased member’s benefit was cashed in favour of their LPR, that is, paid to their estate, a maximum of two payments would be permitted.

Where the deceased member’s benefits are cashed in the form of a pension, there are restrictions in relation to whom can be the death benefit pension recipient and conditions where the recipient was a child of the deceased (refer SIS regulation 6.21(2A) & 6.21(2B)).

3. Determining the value of the death benefit

The death of a member is a compulsory cashing requirement and to effect requires the deceased member’s entitlements to be determined. This will generally require the SMSF’s financial statements to be brought up to date to determine the member’s entitlements at the relevant time. Part of this will be to determine the market value of fund assets, which may present a challenger where there is no ready market to provide a market value for an asset, for example, non-listed shares and real property.

The timing of determining the deceased member’s balance will also depend upon the type of interest, as follows:

• Reversionary pension – date the pension reverts, being the date of death of the member;
• Accumulation interest – the date the death benefit is paid;
• Non-reversionary pension – the date the death benefit is paid.

Where an SMSF member was being paid a defined benefit pension whether there is an entitlement on death to the deceased member’s dependant(s) will be dependent upon the type of defined benefit pension and whether or not it was reversionary.

Of course, reference should always be made to the fund’s trust deed for any provisions that apply to dealing with cashing a deceased member’s interests in the fund.

4. PAYG withholding obligations.

An SMSF trustee may have PAYG withholding obligations when it pays a superannuation death benefit. These obligations may include requirements to:

• Register as a PAYG withholder.
• Withhold and remit the relevant amount to the ATO.
• Provide relevant reports to the superannuation death benefit recipient and the ATO.

Whist an SMSF may have an obligation to register and report, it may not have a requirement to withhold and remit.

An SMSF is required to register as a PAYG withholder in the following superannuation death benefit payment scenarios:

• Lump sum death benefit
• Paid directly to an individual who is not considered a ‘death benefits dependant’, as defined in section 302–195 of the Income Tax Assessment Act 1997 (ITAA), that is, a tax dependant, for example an adult child of the deceased who was not in an interdependent relationship with the deceased or was considered ‘financially dependent’ upon the deceased at the time of the member’s death;
• Paid directly to the LPR of the deceased, that is, to the estate of the deceased SMSF member.
• Superannuation death benefit pension
• Where neither the deceased member nor the superannuation death benefit pension recipient was at least age 60 at the time of death of the member.

Notes:

1. The SMSF trustee must also obtain a Tax File Number (TFN) declaration (NAT 3092) from the death benefit payment recipient, except where the payment is made to the deceased’s LPR (estate).
2. If the deceased member was in receipt of a capped defined benefit income stream (CDBIS) at the time of death, the SMSF should have been registered for PAYG withholding. However, a TFN declaration would still be required to be obtained from the death benefit recipient where they fall into one of the above categories.

The SMSF will have an obligation to withhold from the superannuation death benefit payment the relevant amount and remit to the ATO as follows:

• Lump sum death benefit
• Paid directly to an individual who is not considered a ‘death benefits dependant’, as defined in section 302–195 of the ITAA – withhold the relevant amount per Schedule 12 – Tax table for superannuation lump sums.
• Superannuation death benefit pension
• Where neither the deceased member or the superannuation death benefit pension recipient was at least age 60 at the time of death of the member – withhold the relevant amount per Schedule 13 – Tax table for superannuation income streams.

Notes:

1. Whilst there is a requirement for the SMSF to register as a PAYG withholder in respect of a lump sum superannuation death benefit payment made to the deceased member’s LPR (estate), the withholding amount is nil.
2. Where the superannuation death benefit is paid as a lump sum to the deceased member’s LPR (estate) and ultimately paid to a non-dependant for income tax purposes, the responsibility for keeping aside enough in the estate to pay the applicable amount of tax lies with the Executor of the deceased member’s estate.

The SMSF will have an obligation to provide relevant reports to both the death benefit recipient and the ATO, as follows:

• Lump sum death benefit paid either directly to an individual who is not considered a ‘death benefits dependant’, as defined in section 302-195 ITAA 1997 or paid to the deceased member’s LPR (estate):
• Provide the recipient with a copy of the PAYG payment summary – superannuation lump sum form (NAT 70947) within 14 days of making the lump sum payment.
• Provide the ATO with the original of each PAYG payment summary together with a PAYG withholding payment summary statement (NAT 3447) by no later than 14 August following the end of income year in which the payments were made.
• Superannuation death benefit pension
• Provide the recipient with a copy of the PAYG payment summary – superannuation income stream (NAT 70987) in respect of all income stream payments made in respect of the income year by not later than 14 July following the end of the income year.
• Provide the ATO with the original of each PAYG payment summary together with a PAYG withholding payment summary statement (NAT 3447) by no later than 14 August following the end of income year in which the payments were made.

5. Transfer balance account reporting obligations

An SMSF must use the transfer balance account report (TBAR) to report transfer balance cap events to the ATO. The TBAR enables the ATO to record relevant transactions in an individual’s transfer balance account (TBA) so that they can track an individual's balance for both their personal transfer balance cap (TBC) and total superannuation balance (TSB).

In respect of the death of an SMSF member, the events that would require reporting for transfer balance account (TBA) purposes would be:

1. Deceased SMSF member’s benefit paid as a new death benefit account-based pension (ABP) to their surviving spouse or other eligible death benefit pension recipient. This is reported as the commencement of a new retirement phase income stream
2. Deceased SMSF member’s pension reverts to their surviving spouse or other eligible death benefit pension recipient. This is also reported as the commencement of a new retirement income stream. However, the respective TBA credit will not arise in the death benefit pension recipient’s TBA until the 12-month anniversary of the date of reversion.

6. Someone to take the lead

Advisers, accountants, and administrators are in the prime position to take the lead and guide their SMSF client through this traumatic period. By understanding the compliance requirements they can ensure that the SMSF satisfies the relevant compliance requirements when dealing with the death of an SMSF member, alleviating this burden and enabling their client to focus on family.