When a member of a superannuation fund passes away, a member’s benefit (referred to as a “death benefit”) must be cashed out “as soon as practicable after the member dies”. So how long is too long to wait before paying out a member’s death benefit post death?
This question is particularly important for self managed superannuation fund (“SMSF”) trustees who are tasked with paying out the “death benefit” of the deceased member (being the deceased’s executors, usually individuals related to the deceased, rather than unrelated trustees as is the case in retail or industry funds).
ATO’s changing view
What does “as soon as practicable” mean? This wording is not defined in superannuation or taxation legislation which can make it difficult for trustees to fully understand their obligations.
Despite this, the Australian Taxation Office (ATO) had previously provided guidance to trustees about the recommended timeframe. It had been of the view that “as soon as practicable” meant that the trustee had six months from the date of the member’s death, to pay out the death benefit out of the fund.
Particularly for SMSFs, the trustees are usually grieving family members. During the initial six months post death, they are already dealing with other mentally and emotionally taxing tasks arising from the death of their loved one, so the expectation that they are to also organise cashing out the member’s death benefit and paying it out to beneficiaries, in practice can be a somewhat unrealistic expectation.
The ATO has recently removed reference to their six month timeframe definition via their website, providing some relieve to the grieving trustees. But this does not mean that a trustee can take as long as they wish. The trustee still has the obligation to pay out the death benefit “as soon as practicable” under the Superannuation Industry (Supervision) Regulation 6.21(1). It is also yet to be determined whether the removal of this reference was intentional, or an omission by error by the ATO.
Why is the timeframe so important?
SMSF auditors review trustee actions in respect to administering the SMSF. Distribution of death benefits must occur, but during the administration period (post death of the member and before the distribution of death benefit), where the deceased member was in pension phase, the fund can continue to claim “exempt current pension income” (ECPI) where essentially, any income generated from the fund attributed to the pension-phase account, would not be taxed.
While this could be an incentive to trustees to take their time paying out the death benefit, an auditor will likely expect an explanation for delay in order to comply with their own obligations, even though the six-month guideline no longer appears on the ATO website.
Superannuation fund trustees are under an obligation to act honestly in all matters concerning the fund. For example, delaying payment of a death benefit to claim ECPI or waiting for the market to pick up before selling fund assets (e.g. property or shares), may be considered taking advantage of an extended time frame, and in turn possibly contravening the trustee’s obligations.
What should you do?
If you foresee an extended period of time (over 6-12 months) before the death benefit would be paid out of the fund, it is a good practice to document in writing the reason for delay which can assist the auditor with understanding the circumstances preventing the trustee from meeting their obligations.
How we can help
Our experienced lawyers in the Moores Deceased Estates team can provide guidance to SMSF trustees by assisting with navigating pay out of death benefits, and meeting their obligations upon the death of an SMSF member.
Contact us
Please contact us if you would like further information on how we can assist.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to your organisation.