The ATO will take a flexible compliance approach to industry practice around the cashing of superannuation death benefits prior to 1 July 2017.
The impending introduction of the Transfer Balance Cap has highlighted an issue with the treatment of superannuation death benefits, which the ATO has addressed in Practical Compliance Guideline 2017/6 superannuation reform: commutation of a death benefit income stream before 1 July 2017.
The ATO notes, in the PCG, that when a super fund member dies the super fund is required to cash that member’s super interest to their beneficiaries or legal personal representative as soon as practicable. For a dependant beneficiary the death benefit can be cashed by lump sum, death benefit income stream or a combination of the two.
“A superannuation provider will not comply with the compulsory cashing requirement if it allows the deceased member’s superannuation interest to remain in the accumulation phase after a time when it became practicable to cash the deceased member’s superannuation interest,” says the ATO. Though there is a limited exception where the balance is rolled over to another super fund for cashing.
“The Commissioner has become aware that industry participants have inferred that subsection 307-5(3) provides a mechanism for the spouse of a deceased member to roll over a death benefit income stream and retain the amounts as their own superannuation interest without the need to immediately cash-out that benefit. We understand this inference resulted from issuing public guidance without explicitly clarifying the cashing requirements and led to an industry practice adopting this position.”
The guidance the ATO refers to is Taxation Determination 2013/13.
“The Commissioner’s view is that the roll-over by a spouse of a deceased member’s death benefit income stream does not change a superannuation provider’s regulatory requirement to cash the deceased member’s superannuation interest as soon as practicable. This means that the superannuation provider that has received the rolled over death benefit must immediately cash the deceased member’s superannuation interest in the form stated in paragraph 7 of this Guideline.”
“However, the Commissioner acknowledges that the industry practice that has developed means that a number of death benefit income streams have been commuted, rolled over and treated as the spouse’s own superannuation interest. This may have resulted in the amounts commuted from the death benefit income stream becoming mixed with the spouse’s other superannuation interests and/or remaining in accumulation phase.”
“In recognition of the inference drawn resulting in the industry practice and the significant practical difficulties for superannuation providers that have adopted this position to trace, value and then cash superannuation death benefits if they were now to try and apply the Commissioner’s position, the Commissioner will adopt the compliance approach outlined in this Guideline.”
PCG 2017/6 says that the ATO Commissioner will not apply compliance resources to review if an SMSF has complied with the death benefit compulsory cashing requirement, 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 meets the requirement of subsection 307-5(3).
“This approach only applies in respect of superannuation death benefits that have been rolled over before 1 July 2017,” says the ATO.
Sole Purpose Test
24 May 2017