Recently there has been some confusion around whether a death benefit income stream which failed to meet the minimum pension standards would be required to pay out the entire amount as a death benefit lump sum in order to meet the cashing requirements of paying a death benefit.
At Accurium we were of the view that this was not the case and the cashing requirements would continue to be met if the income stream was recommenced as a new death benefit income stream, as long as the pension standards continued to be met from that time onwards.
To obtain clarity on this issue we raised a question with the ATO.
The ATO provided us with a response and have subsequently also released guidance on this issue on their website.
The potential issue
Where a retirement phase income stream does not meet the minimum pension standards it will not be treated as an income stream for tax purposes and will be taken to have ‘ceased’ for this purpose at 1 July of the financial year. A TBAR debit will be reported based on the 30 June balance. Any payments made in the year would be treated as lump sums.
The issue in question was what happens when a reversionary income stream or death benefit income stream ‘ceases’ for tax purposes in the year in which the pension standards were not met. We know that a death benefit income stream (reversionary or non-reversionary) cannot be commuted to accumulation phase in accordance with the cashing rules of regulation 6.21 of the Superannuation Industry (Supervision) Regulations (SISR). So does the income stream ceasing for tax purposes trigger a need to pay out the entire benefit as a death benefit lump sum?
The ATO response
The ATO have published ‘Death benefit income streams – meeting minimum pension payment requirements’ which provides guidance on cashing a death benefit and preventing contraventions when minimum pension standards are not met.
Sub regulation 6.21(2) of the SISR prescribes the form in which the deceased members benefits must be cashed. Cashing the benefits in the form of a reversionary or death benefit income stream only satisfies the compulsory cashing conditions as long as the interest can continue to be cashed in that form. Therefore, a failure to meet the minimum pension standards may result in a contravention of SISR 6.21.
Any payments made during the year were not from a retirement phase income stream; they were lump sum payments and so would contravene the requirement of paragraph 6.21(2)(a) that you can only have a single lump sum or an interim and final lump sum.
Indeed, where this contravention has occurred the trustee must act swiftly to prevent further contraventions by ensuring death benefits continue to be cashed ‘as soon as practicable’.
The ATO have identified that, for example, as long as the trustee immediately commences to pay a new death benefit income stream as soon as they become aware of the breach, and then continues to meet the minimum standards for that income stream, the Commissioner will accept that the trustee is meeting the requirement of cashing ‘as soon as practicable’ and will not have further contravened the SISR. This is because the new income stream’s payments will come out as soon as they practically should. Note that if the income stream which failed the pension standards was a reversionary income stream, the new income stream would be a death benefit income stream not a continuation of the reversionary income stream.
By taking this action the trustee would rectify the issues that caused the breach and prevent future contraventions of SISR 6.21, but would not remove the breach that has already occurred.
The ATO note that failure to resolve the matter swiftly once the trustee is aware of the breach may have significant compliance consequences.
This ATO guidance on the treatment of death benefit income streams provides clarity for trustees on how they can continue to comply with the SISR in the event of not meeting the minimum pension standards in a year. However, any payments that were made in the year may still breach the SISR 6.21 cashing requirements and may result in consequences for the trustee.
The best course of action is of course for trustees to be fully aware of their minimum pension payment requirements and plan ahead in order to ensure the pension standards are met each year, especially on death benefit income streams, to avoid issues with breaching the SISR.
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.