Senior SMSF Technical Specialist
My client, who is under age 60, would like to take a lump sum payment from a death benefit pension. Are they allowed and if so, how will the lump sum be taxed?
Since 2017, death benefit pensions have had to follow “extra rules”. The ability to stop a death benefit pension and “roll back” the proceeds to accumulation was removed from 1 July 2017 and since that time, this type of pension has also had to be quarantined – it isn’t possible to combine this type of pension with a member’s other superannuation monies.
However, a member in receipt of a death benefit pension is permitted to commute some of their pension and take a lump sum payment (ie a partial commutation), provided:
- the resulting lump sum is paid out to the member, and
- if the member hasn’t already taken the minimum pension for the financial year, there will be enough of a balance remaining in the pension account to do so.
Further, there are no additional restrictions about how many lump sum payments the member is permitted to take from a death benefit pension. The super rules which limit a trustee to paying an interim lump sum death benefit and then a final death benefit have no application here. These limits only apply to the initial compulsory cashing of death benefits where the trustee resolves to pay lump sum benefits to beneficiaries and the monies leave the superannuation system. As such, there is no limit on the number of times a member is permitted to commute part of their death benefit pension and take a lump sum payment.
In fact, if the deceased was less than 60 and the beneficiary is also less than 60, it may be tax effective for the beneficiary to draw any benefits in excess of the minimum pension as a lump sum payment (rather than a pension payment).
This is in recognition of the fact that pension payments, to the extent they consist of taxable component, will be assessable income taxed at marginal rates, less a 15% tax offset. Whereas a lump sum payment will be non assessable non exempt income provided the beneficiary was a dependent for tax purposes.
This was not always the case. Prior to 1 July 2017, lump sum payments from death benefit pensions stopped being treated as a lump sum payment from a death benefit if the commutation occurred more than six months after death or three months after probate. As such, a lump sum payment for a member under age 60 could have been taxable. Whereas, from 1 July 2017, lump sum payments from death benefit pensions will always keep their status (and tax treatment) as a death benefit payment, even if it has been quite a few years since the original member passed away.
If you are assisting clients with documenting such benefits, don’t forget that a decision by the member to draw a benefit as a lump sum benefit (and not as a pension payment) will need to be made in writing and prior to the payment being made. Also be careful to check any software you are using is accounting for the lump sum payment correctly. For example, the trustee will not need to withhold tax or issue a payment summary for the lump sum payment from a death benefit pension if the beneficiary was a dependent for tax purposes. You will also need to ensure you attend to TBAR reporting in respect of the pension commutation.
Heffron has many other blog articles on dealing with death in an SMSF – see previous articles on our website.
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