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What will be covered in this article is whether a deceased member's benefit can be transferred from one superannuation member account to that of a spouse by way of a journal entry.
ATO ID 2015/2 and ATO ID 2015/3 have turned the spot light on the question of, when if ever, can a death benefit be transferred from a deceased members account directly to the member account of the beneficiary
1. Why would you want to transfer a deceased member's account directly to the beneficiaries member account?
There are two reasons
why the potential beneficiary would want a deceased superannuation entitlement to be transferred directly from the account of the deceased member to their account by journal entry.
Firstly, the beneficiary of the deceased may want to keep as much of the death benefit as possible in the superannuation fund. If the death benefit is paid to the beneficiary as a lump sum the beneficiary may not be able to recontribute the benefit to a superannuation fund. The member may not be able to contribute because they have ceased to be eligible to contribute by reason of age and a failure to satisfy the work test. Alternatively they may not be able to recontribute because they have an asset base outside a super fund that cannot be contributed in the contribution period remaining.
Secondly the transfer of an account balance means that the fund has not disposed of the assets used to pay the benefit. This will result in there been reduced transactions costs as the assets held by the fund do not need to be transferred.
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2. Am I able to offset a death benefit against a beneficiary's obligation to contribute to the fund?
The advantage to a member of offsetting a death benefit against a member's liability to contribute to a fund, is that you eliminate the transaction costs
that could arise when the death benefit is paid.
This issue was dealt with in ATO ID 2015/2, where a fund had two members who were a married couple. One of the members died and the trustee determined that the death benefit should be paid to the spouse.
The assets that were going to be transferred to the beneficiary as a result of the payment of this death benefit consisted of cash and shares. The beneficiary intended to recontribute the death benefit to her account after receipt. Therefore, so as to minimise the transaction costs of making the death benefit payment, the beneficiary queried the payment could be made by a journal entry to offset the contribution that she intended to make.
The ATO in ATO ID 2015/2 has refused to acknowledge that a death benefit could be paid by means of journal entry. The reasons for this are outlined below.
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3. Why can't a death benefit to be paid by journal offset?
Section 307-5(4) of the Income Tax Assessment Act 1997 (ITAA97) defines a death benefit as a "payment to a taxpayer from a superannuation fund, after another person's death, because the other person was a fund member".
The word "Payment" is not defined in the ITAA97 and so it assumes it's common law meaning. In considering whether a journal entry could be considered as "payment", the ATO looked at the case of Harmony and Montague Tin & Cooper Mining (Spargo's) (1873). The principal outlined in that decision was that "where two parties both have a present liability or legal obligation to the other (mutual liabilities or mutual obligations) and they make an agreement and set off the liabilities against each other" that mutual offset was regarded as having made a payment.
Unfortunately, a more recent decision, Case 18/97 ATC 227, establishes the principal that as the beneficiary does not have an obligation to contribute back to the fund, this means that there is no present obligation on the part of the member and therefore there is no mutual obligation which requires offset. As there is no obligation to the member to contribute, the offset principle established in "Spargo's case" does not apply.
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4. What about the SIS? Does that allow a death benefit to be paid by journal entry?
The payment of a death benefit by a journal entry would also breach Regulation 6.17 of the Superannuation Industry (Supervision) Act 1993 (SIS).
This section requires that a member's benefit must be paid:
- By being cashed in accordance with Division 6.3 of SIS
- By being rolled over or transferred in accordance with Division6.4 of SIS
- By being allotted under Division 6.7 (spouse contribution splitting)
Journal entries are insufficient to satisfy the requirement of being cashed under the SIS Act and the Regulations
5. How can benefits be retained for a spouse in a fund?
Through the payment of a death benefit pension to the spouse.
It is not clear why the husband and wife in ATO ID 2015/2 did not simply pay a death benefit pension to the surviving spouse as this would have achieved their goal of retaining the benefits in the fund for the benefit of the surviving spouse.
One reason that the payment of a death benefit pension may not have been paid as a pension is that the trust deed prevented the payment of death benefits as a pension.
I have seen a recent example of a deed that did not permit the payment of death benefit pensions in certain circumstances. In this case, the deed required a binding death benefit nomination to be in place before a death benefit could be paid as a pension. If the binding death benefit nomination is not in place, the death benefit needs to be paid to the deceased member's estate.
What the solicitor who drafted this deed was trying to ensure was that the member had given proper consideration to their estate plan. By requiring death benefits to be paid to the members estate in circumstances where a binding death benefit nomination was not in place, the solicitor ensured that the benefits were going to be dealt with under the member's will and in many cases the will is the only estate planning document that is regularly reviewed by fund members.
So the lesson that comes from ATO ID 2015/2 and ATO ID 2015/3 is that trustees and fund members need to consider how death benefits are going to be paid, before the member actually dies. They need to understand what is contained in the fund trust deed and other associated estate planning documents in order to have a comprehensive estate plan.
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Mark Wilkinson of Wilkinson Superannuation has had 30 years' experience in advising clients and their advisers on the issues that arise in a SMSF on the death of a member. Mark has published a number of books and guides and is a sort after public speaker and a member of the Institute of Chartered Accountants Australia and New Zealand Superannuation Committee.
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The information is not a recommendation and has been prepared without taking into account the objectives, needs, financial and taxation situation of any particular individual. For this reason any individual should, before acting on the content, consider the appropriateness of it having regard to their own personal circumstances, and if necessary seek professional advice. Wilkinson Superannuation and Financial Consulting Pty Ltd or Deed Dot Com Dot Au Pty Ltd and any related entities, do not accept any liability for any loss, damages or outgoings rising out of the use of all or any part of this information. This is information is directed and available for the use of Australian Residents only and must not be used or distributed without the written consent of Wilkinson Superannuation and Financial Consulting Pty Ltd
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