Some things in life are not easy and some things don’t make much sense. Unfortunately superannuation often falls into both categories.
Take the situation where a husband and wife have established an SMSF. After many years of managing their SMSF successfully and accumulating much wealth in their fund, the husband passes away.
Under the superannuation law, the death triggers a compulsory payment where the deceased member’s superannuation savings must be paid out as a lump sum death benefit either to a dependant or to his estate as soon as possible.
In this case, the wife does not need the lump sum death benefit payment as she has enough income without it. She would rather the money be retained in the SMSF. In fact if the lump sum payment is made to her, she would simply deposit the money back into her SMSF. So the wife, with the agreement of her accountant, records a journal entry in the SMSF’s financial accounts that reflects a lump sum death benefit was paid to her and then was deposited back into the SMSF.
Sounds fine, what’s the problem?
There was no problem in the wife being able to put the money back as she hasn’t exceeded her contribution caps and she also meets the work test in order to make contributions into her SMSF. So what is the problem?
Well, superannuation law requires the death benefit payment to be ‘cashed’. This means, it must be paid out of the SMSF. If assets need to be sold to fund the payment, that must be done. Once paid, it can then be contributed back into the SMSF if the recipient so wishes. You cannot simply make a journal entry without physically making the payment.
The ATO has recently issued two publications, ATOID 2015/2 and ATOID 2015/3 that address this issue. In these documents, the ATO explains that cashing involves an SMSF making a payment which reduces the member’s benefits in the fund. A journal entry to reduce the deceased’s member account would not amount to cashing, and therefore, would not satisfy the law.
Even if there are no tax implications, in order to comply with the superannuation law, a death benefit must be paid out. Otherwise you would have contravened the law. It’s a silly law and one that doesn’t make much sense to those who are already grieving the loss of a loved one.
Monica Rule is an SMSF Specialist and the author of The Self Managed Super Handbook – Superannuation Law for SMSFs in plain English – www.monicarule.com.au