Head of Education & Content
Hopefully the death of an SMSF client is not something you are dealing with every day. But, when the inevitable does happen, are you comfortable you know what’s allowed by the super law and how to maximise the outcome for those left behind?
We are often contacted by accountants concerned because an SMSF’s auditor has raised a management letter point or lodged an auditor contravention report where one of the fund members has died.
Usually the auditor’s concerns fall into two categories.
The first is funds where the death benefit doesn’t appear to have been dealt with in a timely manner.
Death is one of the last remaining “compulsory cashing” events (an event where the trustee is required to pay a benefit either in lump sum or pension form or some combination).
In terms of a timeframe, the super law requires a deceased member’s benefits to be dealt with “as soon as practicable” after death. Neither super nor tax legislation specifically define “as soon as practicable”. However, the ATO has previously indicated that as a general principle, it expects six months is more than enough time for most SMSFs to deal with a death benefit.
In cases where this is not possible, we suggest trustees document the reasons why, when the death benefit is likely to be dealt with and why they feel they are still within the “as soon as practicable” timeframe. For example, factors which could cause acceptable delays in the payment of death benefits include:
- delays in locating potential beneficiaries
- allowing trustees time to determine to whom the benefit will be paid (eg assessing the validity of binding nominations) and in what form (eg pension and/or lump sum), including seeking advice as to the tax consequences of particular strategies
- dealing with legal disputes
- obtaining up to date valuations of fund assets
- calculating the deceased’s account balance(s)
With this additional information to hand, auditors may not feel further action is warranted.
The second category of auditor concern is often the number of payments. If some or all of the deceased’s super is to be paid as a lump sum, super law permits up to two lump sums only to be paid:
- an interim amount that is no more than the value of the benefit at the time of the member’s death, and
- a final payment.
This recognises that sometimes there will be a period in which the exact amount to be paid is still being finalised and it might make sense to partially pay out the death benefit in the meantime.
This “two lump sums” limit applies to each beneficiary and each interest held by the deceased. If an individual had (say) two pensions and an accumulation account, then the trustee could pay out the benefit to a single beneficiary in up to six lump sums (but no more than two from each account). If there were two beneficiaries, up to 12 lump sums could be made (but again, no more than two for each beneficiary from each account).
There is no equivalent limit on pensions – in theory an unlimited number of pensions could be commenced for any eligible beneficiary from a single super interest of the deceased (and an unlimited number of lump sum commutations subsequently made from those death benefit pensions).
Whilst we are not aware of the ATO seeking to attack trustees who inadvertently fail this rule, it is something trustees and their advisers should be mindful of before any amounts are paid from the fund.
Finally, whilst the two issues above are the most common concerns I see raised by auditors, it’s important to remember that the auditor’s role is limited. There are other issues to be considered which are outside their scope. For example, whether the surviving spouse has been able to maximise the use of their transfer balance cap, or whether the trustees (and their advisers) are aware that the payment of a lump sum is not the only option just because the deceased’s pension account wasn’t reversionary.
Dealing with the death of an SMSF member can be complicated and often specialist advice is needed.