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Superannuation revolving door on death benefits

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According to data published by the Australian Taxation Office (“ATO”) the growth in the use of Self Managed Superannuation Funds (“SMSF”) continues. However, a recent publication stated that in the 2012/2013 financial year for the first time in the SMSF sector’s history the amount paid out by SMSF’s was greater than the amount contributed to them. Money can only, generally, be paid out of a SMSF in the form of transition to retirement pension, a retirement/ reversionary pension or as a death benefit when a member dies.

When a member dies their death benefit will be paid in accordance with the rules of an existing pension; the provisions of the trust deed; the trustee’s discretion; or a binding death benefit nomination or a combination of these.

The superannuation legislation requires that on a member’s death, the member’s death benefit must be “cashed as soon as practicable”. In two recently published Interpretive Decisions the ATO has provided guidance on its interpretation of the meaning of the term “cashed”. In the ATO’s view the term “cashed” requires the deceased member’s death benefit to be paid out of the SMSF. It is not possible, for example, for the surviving spouse who is entitled to receive the death benefit to leave the assets in the SMSF and transfer them to his or her member balance by way of a journal entry.

In the ATO’s view, if a surviving spouse wishes to contribute a death benefit received from their deceased partner into the SMSF the money or assets must actually flow out of the SMSF and then, assuming the spouse is eligible to contribute, be re-contributed into the SMSF.

The ATO’s view, while somewhat unsurprising, highlights the need to consider the asset mix in any SMSF when its members are making estate planning and business succession decisions. Problems will arise in relation to SMSF’s with “lumpy” assets, for example, a SMSF with its main asset being a business premises. In such cases, without some sort of liquidity strategy to ensure that the fund is able to pay death benefits, the SMSF may have no other choice but to sell the property or at the very least transfer it out of the fund and incur the associated transaction costs.

It is also important to ensure, particularly in a business succession context where business premises are owned within a SMSF, that appropriate special purpose binding death nominations are allowed by the deed and put in place to provide that, if the property must come out of the SMSF, it goes to the intended family members.

DDCS Lawyers can provide advice on all legal aspects of SMFS’s and can provide advice on appropriately structured binding death benefit nominations to ensure that estate planning and business succession requirements are met.

Brendan Cockerill is a Senior Associate of the firm.

18 Kendall Lane, New Acton, Canberra

phone (02) 6212 7600 [email protected], www.ddcslawyers.com.au

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