In response to uncertainty about the commutation options available to SMSF members who are in receipt of a death benefit pension, the ATO has released guidelines which set out a practical administrative approach.
[Editor’s note: a commutation is an exchange or a conversion. In a superannuation context, it usually means converting an income stream to a lump sum or another income stream].
On the death of a superannuation fund member, the trustee(s) of the fund are required to pay out the deceased member’s superannuation benefit as soon as practicable.
For dependants of the deceased, a superannuation death benefit can be paid out:
- As a lump sum
- As death benefit income streams that are retained in the superannuation system, or
- A combination of the two.
Based on previously issued ATO public guidance materials, industry participants have inferred that on the expiration of the ‘death benefit period’, the spouse of a deceased member is able to commute a death benefit income stream and retain this amount as their own accumulation interest in the fund, or in another fund, without the need to immediately cash-out that benefit.
The ‘death benefit period’ is the latest of:
- 6 months after the death of the deceased person, and
- 3 months after the grant of probate of the deceased member’s will or letters of administration of the deceased member’s estate.
The ATO’s view is that the commutation of the pension by a spouse does not change the trustee’s requirement to pay out the deceased member’s superannuation interest as soon as practicable.
If the death benefit income stream is commuted, the trustee must immediately pay out the deceased member’s death benefit as a lump sum or as a new death benefit income stream. The requirement to pay out the benefit is not satisfied if the spouse retains this amount in the accumulation phase of the fund, or is rolled over and retained in the accumulation phase of another fund.
ATO compliance approach
Recognising the practical difficulties that many funds will face in identifying and paying out superannuation death benefits, the ATO will not apply compliance resources to review whether a SMSF has complied with the cashing rules provided that:
- The member of the SMSF was the spouse of the deceased on the deceased’s date of death, and
- The commutation and roll-over of the death benefit income stream is made before 1 July 2017, and
- The superannuation lump sum paid from the commutation is a member benefit for income tax purposes because it is being paid after the expiration of the death benefit period.
Relevance to the $1.6 million transfer balance cap
The ability to retain these amounts in a superannuation fund is particularly relevant to individuals who may have superannuation income stream balances in excess of $1.6 million and who are required to commute the excess amount on or before 30 June 2017 to comply with the $1.6 million transfer balance cap. Rather than needing to withdraw any excess income stream amounts that relate to a death benefit income stream (which is outside the death benefit period), these amounts can be retained in the fund.
Peter Burgess is General Manager, Technical Services and Education at SuperConcepts, a leading provider of innovative SMSF services, training and administration. This article is for general information only and does not consider the circumstances of any individual.