Commutation of a death benefit income stream before 1 July 2017
In response to uncertainty about the commutation options available to self-managed superannuation fund (SMSF) members who are receipt of a death benefit pension, the ATO has released guidelines which set out a practical administrative approach.
On the death of a superannuation fund member, the trustee(s) of the fund are required to payout the deceased member’s superannuation benefit as soon as practicable.
For dependants of the deceased, a superannuation death benefit can be paid out:
- As a lump sum
- As death benefit income streams that are retained in the superannuation system, or
- A combination of the two.
Based on previously issued ATO public guidance materials, industry participants have inferred that on the expiration of the ‘death benefit period’, the spouse of a deceased member is able to commute a death benefit income stream and retain this amount as their own accumulation interest in the fund, or in another fund, without the need to immediately cash-out that benefit.
The ‘death benefit period’ is the latest of:
- 6 months after the death of the deceased person; and
- 3 months after the grant of probate of the deceased member’s will or letters of administration of the deceased member’s estate.
The ATO’s view is that the commutation of the pension by a spouse of a deceased member’s death benefit income stream does not change the trustee(s) requirement to payout the deceased member’s superannuation interest as soon as practicable.
This means that if the death benefit income stream is commuted, the trustee(s) must immediately pay out the deceased member’s death benefit as a lump sum or as a new death benefit income stream. The requirement to have paid out the benefit is not satisfied if the spouse retains this amount in the accumulation phase of the fund, or is rolled over and retained in the accumulation phase of another fund.
ATO compliance approach
Recognising the practical difficulties that many funds will face in identifying and paying out superannuation death benefits if they were now required to apply the ATO’s position, the ATO will not apply compliance resources to review whether a SMSF has complied with the cashing rules 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 is being paid after the expiration of the death benefit period.
This approach only applies to death benefit income stream amounts that are commuted and transferred to the spouse’s accumulation phase interest before 1 July 2017.
Relevance to the $1.6 million transfer balance cap
The ATO’s compliance approach enables individuals, before 1 July 2017, to commute some or all of their superannuation income stream that comprises a death benefit income stream (which is outside the death benefit period), and retain this amount in the fund without fear of compliance action by the ATO.
The ability to retain these amount in a superannuation fund is particularly relevant to individuals who may have superannuation income stream balances in excess of $1.6 million and who are required to commute the excess amount on or before 30 June 2017 to comply with the $1.6 million transfer balance cap. Rather than needing to withdraw any excess income stream amounts that relate to a death benefit income stream (which is outside the death benefit period), these amounts can be retained in the fund.
Even though for many years this has been common industry practice, the ATO’s compliance approach provides important clarification and ‘peace of mind’ that the ATO will not, in these circumstances, be applying compliance resources to reviewing whether or not an SMSF has complied with the death benefit payment requirements.