There is not much guidance regarding the definition of “as soon as practicable” in the income tax legislation. However, there has been a long-held view it is 6 months from the date of death of the member. This perhaps stems from the days before Simpler Super (i.e. pre 1 July 2007), where if a reversionary pension was commuted within six months from the date of death or three months from grant of probate or letters of administration (which was the latter), the commuted amount was taxed as a lump sum death benefit (which had a more favourable taxation treatment). If it was commuted and taken as a lump sum outside the death benefit period, it was then considered an ordinary Eligible Termination Payment (ETP) which was taxed at normal lump sum rates (less favourable taxation treatment).
The ATO provided some further clarification in Private Binding Ruling (PBR) Authorisation Number 1051222473595.
In the PBR, the ATO refer to dictionary definitions of the term ”practicable”:
The Oxford English Dictionary defines "practicable" as meaning "able to be done or put into practice successfully".
The Australian Macquarie Dictionary defines the term as "capable of being put into practice, done, or effected, especially with the available means or with reason or prudence; feasible".1
The Explanatory Statement to the to the Income Tax Assessment Amendment (Superannuation Measures No. 1) Regulation 2013 (Cth)2 provides a number of examples of where, notwithstanding delay, the payment of a superannuation death benefit will be made "as soon as it was practicable" after a member's death.
What we can infer from the PBR and the EM to the legislative instrument are the following key points:
• The trustee needs to take all reasonable steps to administer the fund. This could include appointing an administrator to ensure compliance with legislation and regulations and in a timely manner. Trustees having difficulty paying the benefit due to a lack of understanding or personal circumstances will not be seen by the ATO as reasonable delays.
• Practicable means all things within the trustees’ power; not all things that are convenient. One of the delays in payment of a death benefit can be the sale of assets; particularly where there are lump assets such as property and related parties to the fund have a significant interest in them.
• Trustees need to do all within their power to sell the assets and pay the death benefit. Delays due to the trustees waiting for the best time to sell to maximise the asset values or looking for a way to retain the asset in super will not satisfy the ATO the benefit has been dealt with “as soon as practicable.” The trustee’s role is to pay the death benefit - not optimise the death benefit.
That’s not to say benefits paid outside the six-month timeframe are not considered death benefit payments. The ATO may accept reasons such as a Death Benefit Nomination being challenged by beneficiaries, or even finding eligible beneficiaries. Indeed, the ATO look to legal impediments to paying a death benefit in a timely manner as providing the basis for a reasonable delay. In fact, such a delay may extend well beyond six months and may even stretch into years. This would still be within the realms of “as soon as practicable.”
The number of lump sums that can be paid is another area of consternation for trustees and members of SMSFs.
Under subparagraph 6.21(2)(a)(ii) of the Superannuation Industry (Supervision) Regulations 1994 (SISR), death benefits may be cashed in the form of an interim lump sum and a final lump sum. This regulation also states that, on a member’s death, a compulsory condition of release has taken place which requires benefits to be paid. Therefore, the deceased’s benefit must be ‘cashed’ (in the form of two lump sums and/or a pension or pensions) and, if lump sums are chosen as the death benefit payment option, trustees must structure the fund’s affairs around two such payments.
This contrasts with ordinary lump sums where, if the member has satisfied a condition of release such as retirement and their superannuation consists of Unrestricted Non-Preserved benefits, they are entitled to as many lump sums as they wish. A similar logic applies with pension payments. A member may take multiple pension payments per annum as they wish.
A breach of the death benefit payment rules may mean the fund receives a qualified audit report, which can be quite distressing in an already upsetting time. The ATO do mention on their website the importance of trustees understanding and complying with the death benefit payment rules. They also mention the importance of trustees engaging with the fund auditor if they believe there has been a breach. Whilst we have not seen any penalties levied on trustees breaching the death benefit payment rules, there are provisions for breaches of the SIS legislation and regulations.
It is important that SMSF trustees and members understand the rules so they can plan for the demise of members and ensure compliance with the super rules as well as minimising the stress and heartache when a loved one passes away.
To learn more about the benefits of having access to current data and how technology has helped simplify and streamline the process of death benefit lump sum payments register for our free upcoming webinar, Future Proofing an SMSF - The Value of Regular Reporting.