When a member in an SMSF passes away the trustee will decide how to pay out the death benefit. A new administrative requirement for the trustee to consider is whether a transfer balance account report (TBAR) is required, and this will depend on how and to who the death benefit is paid.
There are generally three different options for paying a death benefit from a self-managed superannuation fund (SMSF):
- as a reversionary income stream (where the terms of an existing income stream specify automatic reversion to an eligible beneficiary),
- a death benefit income stream (to an eligible beneficiary), or/and
- as a lump sum payment.
No TBAR needs to be completed to report that retirement phase income streams have ceased for a member who passed away. However, the trustee may be required to complete a TBAR for beneficiaries who receive a death benefit in some circumstances which we outline below.
Reversionary income streams
When a member in receipt of an income stream passes away the pension documentation should be reviewed to determine if the pension terms specified that it was to be paid as an automatically reversionary income stream to an eligible beneficiary. An automatically reversionary income stream will transfer to the beneficiary on the date the member passed away. This will be a TBAR event for the beneficiary receiving the reversionary income stream. The reporting date is the date of death, and value is the balance of the income stream at the date of death. Although the TBAR is reported based on the date of death the credit will not be applied to the beneficiary’s transfer balance account (TBA) until 12 months later.
In the case of a reversionary transition to retirement income stream (TRIS), the rules are the same. Even if the original income stream was not in retirement phase at the date of death it will convert to a retirement phase income stream when paid to the beneficiary, and therefore a TBAR will be required.
The beneficiary should consider the impact of receiving a reversionary income stream on their TBA in order to ensure they do not exceed their transfer balance cap (TBC) in 12 months’ time when the credit is applied to their TBA.
Death Benefit Pensions and Lump Sums
Where a deceased member had accumulation accounts or income streams which were not automatically reversionary, death benefits are generally cashed as a death benefit income stream (for eligible beneficiaries), a lump sum out of superannuation, or a combination of both.
A death benefit income stream does not automatically commence on death, the eligible beneficiary must elect to take some, or all, of their death benefit as a death benefit income stream and appropriate pension documentation needs to be completed. The market value of assets will be determined in order to calculate the tax components of the new income stream and the minimum pension payment requirements. The death benefit income stream will be a new retirement phase income stream for the beneficiary and so a TBAR will be required. The reporting date will be the commencement date and value reported will be the commencement value. The TBA credit will apply to the beneficiary’s TBA at the date of commencement. The beneficiary should consider the impact of commencing a death benefit income stream on their TBA in order to ensure they do not exceed their transfer balance cap (TBC).
If a beneficiary either does not wish to, or is unable to, commence a death benefit income stream then the death benefit can be paid as a lump sum out of the superannuation system. Any amount that is paid as a lump sum death benefit does not require a TBAR.
Ron and Diane are married and are the sole members of their SMSF. At 1 July 2018 Ron had an account-based income stream and an accumulation account, Diane had an accumulation account. The SMSF is a quarterly reporter for TBAR.
On 3 June 2019 Ron passed away. The value of his income stream on 3 June was $1,545,000 and it transferred to Diane at that date as an automatically reversionary income stream. Ron’s accumulation interest also formed part of the death benefit to be paid to Diane. On 14 July 2019 Diane decided to take $55,000 of Ron’s accumulation balance as a death benefit income stream and the remaining $120,000 was paid out as a death benefit lump sum. This ensured that Diane would not exceed her TBC of $1,600,000.
Diana will need to report the following TBAR events:
- A credit of $1,545,000 by 28 July 2019 for the reversionary income stream (the credit will not be applied to her TBA until 3 June 2020)
- A credit of $55,000 by 28 October 2019 for the death benefit income stream
No TBAR is required for the $120,000 paid out as a death benefit lump sum.
When a member passes away the administrative requirements of the SMSF may be the last thing on the mind of those close to them. However, in particular for funds which are required to report quarterly, there are important deadlines to be aware of in respect of TBAR events. Reversionary income streams must be reported based on the date of death and death benefit income streams must be reported based on the commencement date of the new income stream.
The ATO has indicated that it is currently taking a supportive approach if TBARs are lodged late. If a trustee is unable to lodge by the due date, they do not need to seek a formal extension as long as they are working towards lodging as soon as possible. Make sure trustees are aware of the TBAR rules and required timeframes in order to avoid any issues after a member passes away.