Don’t take too long to a pay a benefit – it may change from a member benefit to a death benefit!

17 August 2023

 

A very interesting (and surprising) Private Binding Ruling has been recently released by the ATO (reference details at the foot of the article).  In short, because a trustee (of a self-managed superannuation fund) took over 28 weeks to pay a commutation lump sum, the benefit was considered to be a death benefit and not a member benefit.

 

Gleaned from the abbreviated and redacted version of the Private Binding Ruling (PBR) which has been publicly released the essential facts are as follows;

  • A self-managed superannuation fund was paying an account-based pension to a member
  • The member lacked legal capacity and the member’s brother was appointed the Administrator’s of the member’s estate, this was an appointment by a government tribunal.
  • The brother as Administrator had power to make decisions for the member in relation to member’s financial matters
  • The Administrator decided to fully cash out the member’s account-based pension and completed the relevant forms to fully commute the pension and to instruct the trustee to pay the commutation amount to the bank account of the member.
  • The duly completed pension commutation and payment instructions were received by the trustee (and the trustee acknowledged receipt of the forms)
  • It seems that after the issue of the trustee’s email to the administrator, the member died.
  • Presumably the member was in declining health but the Ruling does describe the death as “unexpected”.
  • The SMSF had a financial adviser and the adviser was notified of the death of the member (on what date is uncertain as it was redacted – but presumably shortly after the death of the member)
  • The trustee of the SMSF ultimately paid out the commutation lump sum 28 weeks after the death of the member
  • The Ruling does not discuss the reason for the delay.

 

The ATO accepted that the pension was an account-based pension and that the member had the right under the trust deed of the SMSF to fully commute the pension and that neither the SIS Act nor regulations prevented or restricted that right to request commutation of the pension.  The Ruling makes no mention as to whether the Trustee of the SMSF had to “consent to” or “approve” the commutation request.  Presumably, then the member had a unilateral right under the trust deed to request full commutation of the pension and the only function of the trustee was to “implement” that request – that is to determine the commutation value and to sell fund assets to generate sufficient cash so that payment could be made.

 

Further the ATO seemingly had no issue with the Administrator exercising the power to commute the pension (as it was not discussed in the published ruling).

 

As previously noted, the Ruling as published gives no details of or reason for the extended time between the receipt of the commutation request and the payment of the benefit.

 

Encouragingly, the Ruling (as published) at paragraph 23 states; “An amount that a member requested to be paid from their superannuation fund before their death, but was paid after their death, may be classified as a member benefit instead of a death benefit depending on the facts and circumstances of the payment”.

 

Paragraph 23 is entirely consistent with the relevant taxation legislation, where the key distinction between member benefits and death benefits is that the former paid to the member (because they are the fund member) and the latter where the benefit is paid to someone else because of the death of the member (section 307-5(1)).

 

In the present case the member requested the full commutation of the pension (albeit by his statutory agent) and that right was unilateral and effective from the time that right was exercised and the trustee’s duty was to implement that exercise of the commutation right by stopping the pension, quantifying the commutation amount and paying the benefit as directed.  In these circumstances the payment is made to the member by reason of the member’s exercise of their membership rights.  The reason for the payment is the effective exercise of the commutation rights of the member and not the death of the member.

 

Less encouragingly at paragraph 25 the Ruling then proceeds to undermine the clarity of the member/death benefit distinction based upon the reason for the payment with the distinction now being based upon the trustee having to consider a shopping list of relevant matters.

The shopping list included the following critical factors:

“(c)            the fund trustee’s knowledge at the time of payment is made (including whether they (the trustee) are aware that the member had died;

 (d)             the entity that the payment is being paid to;

 (f)              whether the payment is made because of and is consistent with the member’s request.”

 

As to the factor (c), if the right to commute the pension and to cash out the commutation proceeds has been exercised in the lifetime of the member, whether by the member (or, authorised agent) and the role of the trustee is restricted to the administrative actions of implementing the commutation request, determining the commutation amount and paying the commutation amount, it should be irrelevant that the these administrative actions occurred after the death of the member and occurred at time the trustee was aware of the death of the member.  Obviously, it would be better if the commutation instruction had been given to the trustee before the death of the member.

 

As to factor (d), the commutation instruction must include the instruction that the commutation proceeds be paid into the member’s bank account.

 

As to factor (f), and this seems to be been the factor which persuaded the ATO that the commutation payment should be treated as a death benefit rather than a member benefit, is that the significant and unexplained delay in payment gave rise to the inference that the relevant parties had withdrawn the commutation request or simply ignored the commutation request – not by express resolution but by their conduct.  Consequently, when the commutation was made the pension had been commuted but not pursuant to the member (or their authorised agent’s instruction) but by reason of the death of the member in circumstances where the pension was not reversionary.

 

In the case of self-managed superannuation funds, factor (f) is of much greater risk given the close connection between the trustee and the member and the possibility that the member’s spouse or legal representative may control or be involved in the control of the fund after the death of the member.  For large super funds, a 26-week delay in payment may well be within their accepted performance standards.

 

Key Points for SMSFs

In short

  • The right to commute the pension must be unilateral right exercisable by the member (so there is no requirement for the trustee to consent to the commutation or approve the commutation)
  • A duly authorised agent of the member can still exercise the commutation right
  • It is critical that the right be exercised before the death of the member
  • It is highly desirable (but not critical) that exercise of the commutation right be notified to the trustee before the death of the member
  • The role of the trustee is simply administrative – to quantify the commutation amount and the pay the commutation amount
  • The commutation payment must be paid to the bank account of the member or paid by cheque (if cheques still exist) with the member as payee.
  • There must be no extended delay between the commutation instruction being made and the payment – a rule of thumb 6 weeks or less.

 

NOTE:  This article was prepared as at August 2023.  The article has not been updated in light of subsequent developments.

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