SMSF Death Benefits

The term “as soon as practicable” appears several times in tax and superannuation law – it’s never defined and often has different meanings depending on the context.

One place it appears is in the timing of death benefit payments. Death is one of the only times in superannuation law where a benefit must be taken from the fund.

SMSF death benefits can be dealt with by paying lump sums, retirement phase pensions or some combination (and simply starting a retirement phase pension constitutes “dealing with” that part of the deceased’s superannuation). Note that dealing with the death benefit means dealing with the entire amount – not just starting to pay a pension with part of the deceased’s account. 

The requirement to cash out the SMSF death benefit is not met until every last dollar has been accounted for and used to provide a pension or pay a lump sum.

When the deceased’s super was providing a pension that automatically reverted (continued) to another person such as a surviving spouse, this requirement is met automatically. Even if the spouse needs to make some changes to his or her own superannuation to avoid negative tax consequences, the trustee has met the requirement to pay the death benefit by recognising the transfer of the pension to its new owner.

Under all other circumstances, however, the trustee must take positive action to deal with the SMSF death benefit. The law requires this to be done “as soon as practicable after the member dies”.

Generally the ATO views six months as plenty of time to pay SMSF death benefits.

(Note that this view has been expressed informally via webinars, website content rather than formally in rulings or interpretative decisions).

That doesn’t mean that not doing so within six months will automatically result in a breach, or penalties or harsh tax consequences. It simply means that if the trustee of the SMSF considers it was necessary to take longer than six months to deal with a member’s death benefits, it will be important to identify and document why that was the case. It would be reasonable for either the ATO or an auditor to critically question these reasons.

We are certainly aware of cases where the payment took much longer (sometimes even years) in cases where there were:

• estate disputes or difficulty in identifying the right beneficiaries
• difficulties in putting trustees in place to make the relevant decisions or at least execute them
• health issues for the surviving spouse who was also the remaining trustee

Note that the ATO would generally look for legal impediments or circumstances that could not reasonably be foreseen when it comes to delays on death benefits. Reasons such as a lack of liquidity in the fund would generally be insufficient – the trustee of any superannuation fund has an obligation to ensure the fund is able to make benefit payments when these are due.

All that said, we are not aware of a single case where the ATO has actually taken away a fund’s complying status or subjected trustees to penalties where the only failure was failure to make an SMSF death benefit payment quickly. The Commissioner’s first focus is normally on ensuring that the beneficiary receives the appropriate benefit.

Death benefits are covered in full in the Heffron Super Companion – an online resource that's regularly updated and will always reflect the latest rules, changes to legislation, case law or regulator views. You can be confident that the information is up to date and accurate. Learn more and subscribe here.