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ATO’s clarification on benefit types a pandora’s box


The ATO has recently provided an update on their view of whether a payment will be treated as a superannuation member benefit or as a superannuation death benefit where a member dies after they have requested a benefit, but before the actual benefit payment by the superannuation fund¹.

Whether a benefit payment is treated as a member benefit or a death benefit will determine the tax outcome and whether it is subject to member benefit death benefit directions, e.g., binding death benefit nomination, or trustee discretion. However, this latest update from the ATO has the potential to open a pandora’s box and lead to legal challenges.

What’s the issue?

Where a member dies after they have requested a benefit payment, but prior to the trustee(s) of the fund effecting the benefit payment, is the benefit payment a member benefit or a death benefit?
There are two areas of concern in respect to this issue:

1. Tax; and
2. Estate planning.

The tax treatment of a benefit payment which is a member benefit, is different from a superannuation death benefit payment. For example, where the member is aged 60 or more at the time of receiving a superannuation benefit payment from an SMSF, the payment is received by the member tax-free. However, the tax implications for a superannuation death benefit will primarily depend on whether the death benefit recipient is a ‘death benefits dependant’ under the Tax Act. For example, generally an adult child is not a ‘death benefits dependant’ and consequently the taxable component of a superannuation death benefit lump sum will be subject to tax.

Turning to the estate planning issue, this concerns who will ultimately receive the benefit payment. Where the benefit payment is a member benefit, it will form part of the estate of the deceased and the payment will generally be subject to the deceased member’s Will. However, where the benefit payment is a death benefit payment, it will be the trustee(s) of the SMSF that will determine the recipient of the death benefit payment, subject to the trust deed, any valid binding member directions and superannuation and trust law.

Example

Mike is the member of the Big Bunch Super Fund, an SMSF, together with his spouse, Carol. This is the second marriage for each of them and they have adult children from their prior relationship, but no children from their current marriage.

Each of their respective estate plans is for their superannuation benefits to paid to each other upon their death, but for personal assets to be distributed between their respective children. As part of their estate plan documents, they have each put in place a binding death benefit nominations to pay their respective superannuation entitlements to each other in respect of their death.

Mike, 66, requests a lump sum benefit on 16 May 2022 for $100,000, comprised $80,000 taxable component and $20,000 tax-free component. Tragically Mike dies in accident on May 18. At that time, the SMSF has not yet paid Mike’s requested $100,000 lump sum benefit. The trustee(s), whilst agreeing to make the payment and confirming that it can make the payment under the trust deed and the relevant superannuation law, had yet to arrange for the sale of some fund investments to provide the cash.

The question is, will the $100,000 benefit payment in respect of Mike, now deceased, be treated as a member benefit or a death benefit? Let’s consider the potential outcomes:

$100k treated as a member benefit:

Tax treatment Estate planning treatment
As Mike is at least age 60 (age 66 at the time of his death), it would be expected that the $100,000 amount would be a tax-free benefit payment.The $100,000 amount will be regarded as a personal asset and form part of Mike’s estate. The distribution of the amount will be subject to the terms of his Will and, based on the information we know, will be distributed amongst his adult children. They will receive their respective share of the $100,000 without the amount being subject to tax.

$100K treated as a superannuation death benefit:

Tax treatmentEstate planning treatment
This will depend upon whether the recipient of the death benefit, either directly from the SMSF or via Mike’s estate, will be a ‘death benefits dependant’ under the Tax Act. Based on the example, a payment to his spouse Carol would be a payment to a death benefits dependant and consequently would be received by Carol free of any tax.

However, if the payment was made to Mike’s adult children, subject to further details, neither of them would be regarded as a death benefits dependant and consequently the taxable component of the benefit paid to them would be subject to tax.
The trustee(s) of the SMSF will determine to whom the benefit will be paid, subject to satisfying the limitations in SIS regulation 6.22 to only cash a deceased member’s benefits in favour of their legal personal representative or one or more if their dependants.

Assuming Mike’s binding death benefit nomination (BDBN) is valid (which is an important document to validate), the payment would be made to his spouse, Carol.

Where Mike’s BDBN is not valid, payment would be determined by the SMSF trustee(s).

The ATO’s (latest) view

The ATO’s view on whether a benefit payment in this scenario is to be treated as a member benefit or a death benefit has evolved over time. There have been a number of Private Binding Rulings on the topic for which have produced different outcomes, as noted in the summary table below:

Date of PBR PBR numberPaid from APRA fund or SMSFSummary of facts Member benefit or death benefit
2011,Aug1011912974150APRA fund• Member over age 60 with allocated pension.
• Member wrote to fund to request withdrawal.
• Fund confirmed request received prior to member’s death.
• Fund processed withdrawal application and remitted funds after death.
Superannuation death benefit.
2018,Oct 51051437446368Assumed APRA fund, but not stated.• Member being paid account-based pension in aged care + incapable of managing affairs.
• Granted Enduring Power of Attorney and attorney managed affairs.
• Attorney provided instructions to Adviser to withdraw. Adviser provided instructions to fund to withdraw all benefits.
• Member died before fund had paid benefits.
Fund paid benefits to (now deceased) member’s nominated bank account.
Member benefit
2019,Nov 51051598540809APRA fund• Member had attained preservation age, but under 64 and met retirement condition of release.
• Completed application posted to fund for withdrawal of benefits.
• Member died a few days later.
• Fund processed application as member benefit payment and paid into (now deceased) member’s nominated personal bank account.
Member benefit
2020,Nov 21051754180223Not stated, but appears to be an SMSF.• Member had terminal medical condition and requested lump sum withdrawal of cash and in-specie transfer of securities.
• Trustee agreed to withdrawal and form of withdrawal.
• Next day, trustee placed sell orders for securities.
• Following day, member died.
• Next day, majority of sale proceeds deposited to fund’s bank account.
• Trustee transferred an amount to deceased member’s personal bank account.
Member benefit
2021,Nov 21051914995135Not stated but appears to be an APRA fund• Member in receipt of a pension.
• Member completed and signed application to close two superannuation accounts. Lodged with the fund on the same day and processed by the fund.
• The member passed away in the same month (whilst not confirmed, appears the member passed away prior to the fund paying the benefit).
• Fund paid benefit to the member’s personal bank account.
Member benefit
2021,Nov 251051918745226Not stated.• Member was suffering from a terminal illness.
• The member lodged a super withdrawal application with the fund.
• Prior to payment of the benefit the member passed away in hospital.
• The fund paid a lump sum benefit to the deceased’s nominated bank account.
Superannuation death benefit

Some of the comments in the PBRs are interesting and in some respect, contradictory. For example, in the 2011 PBR it states:

As a result of the operation of section 307-5 of the ITAA 1997, the payment can not be considered to have been paid to the deceased. Consequently, it is not wholly tax-free as if it were a superannuation benefit paid to a person over age 60.”

Section 307-5 ITAA 1997 provides that for a benefit payment to be a member benefit it must have been a payment to “you”, because “you” are a fund member. The above statement from the PBR seems to imply that once a person has died they are no longer a “you” – the benefit could not have been paid to them. There is also the issue of whether they would still be a fund member at the time of payment.

This also appears to be the approach in the 25 November 2021 PBR as it states:

“In this case, the member died in the 20XX-XX financial year, prior to the payment being made by the Trustee of the Fund. The payment was made after the member died so cannot be considered a member benefit as it will now be distributed to the beneficiaries of his estate.”

However, in the other PBRs the determining factor appears to be whether the benefit was paid to the (deceased) member’s personal bank account, rather than the bank account of the estate. If paid to the (deceased) member’s bank account, a member benefit, if paid to the estate’s bank account, a superannuation death benefit.

Attendees of the SMSF Association National Conference were made aware of the ATO’s latest view via a presentation from Peter Burgess, the association’s Deputy CEO/Director of Policy and Education. He conveyed to attendees that in discussions between the Association and the ATO, that they had advised their settled position to be that a benefit payment should be treated as a member benefit where the member has requested the benefit payment prior to their death, despite the benefit being paid after their death.

The apparent linking of a member’s request for a benefit and it being regarded as paid is interesting as section 307-5 ITAA 1997 refers to a ‘payment’, not a request for payment. The Oxford Languages defines ‘payment’ as “an amount paid or payable”, which would be interpreted to mean that the actual benefit has been paid, or it has at least been approved for payment, and consequently is a commitment and recognised liability of the fund.

Simply requesting a benefit payment does not automatically mean that the member is entitled to the payment nor the fund liable for the payment. The trustee(s) would be required to review the fund’s trust deed and relevant superannuation law to ensure the requested benefit was permitted. It would seem that in addition to there being a member benefit request prior to death, that there would also be trustee approval of the benefit payment, again, prior to the member’s death to evidence a ‘payment’ and that it was to ‘you’, the member, who was still alive at the time and a member of the fund.

However, if this is indeed the settled approach by the ATO for benefit payment, could it be applied to the timing of when a pension benefit is regarded as ‘paid’? Does a member only need to make a request for a pension benefit for it to be regarded as paid?

Generally, a pension benefit requested in June 2022, but not paid until July 2022 would be recognised in the 2022-23 income year. However, applying the ATO’s latest approach it would appear that it could be argued to be included in the 2021-22 income year, the year the member requested the pension payment. As noted above, trustee approval of the pension benefit prior to year-end may also provide evidence that the pension benefit belongs in the income year requested.

Not the final say

Whilst we have a number of PBRs that provide for different outcome and the latest from the ATO on the issue, we must remember that PBRs are only binding on the applicant and comments from the ATO do not have the force of law (it would be very beneficial for the ATO to provide their comments on their website for all to read and refer to). Further, PBRs only focus on the tax issues, as the ATO can only issue a PBR on tax matters. They have not addressed the estate planning consequences of whether a benefit payment is a member benefit or a superannuation death benefit. Whilst there may be a better tax outcome for treating a benefit payment one way or the other, it may not result in all (potential) beneficiaries seeing it that way.

Certainty may only come from the Courts determining the category of a benefit payment. However, is this a practical outcome? Who will volunteer for this not so inexpensive exercise?

Again, it comes back to focusing on the word ‘planning’ in the phrase ‘estate planning’. Where it is known that a member’s death is imminent, whilst time may be of the essence to ensure a benefit payment is treated as a member benefit, consideration will also need to be given to the estate planning consequences and whether there may be aggrieved (expected) beneficiaries.

1. SMSF Association National Conference 2022, Peter Burgess, Deputy CEO/Director of Policy & Education, SMSF Association session 20 April 2022.

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