For some considerable time there has been a great deal of conjecture about whether payments from a superannuation fund after a member’s death can be treated as a member benefit where the member had requested the benefit payment before their death. Recent discussions, fuelled by Private Binding Rulings [PBRs] from the Australian Taxation Office [ATO] and its online guidance, have shed more light on this issue.
1. why the debate of member benefits vs death benefits is a thing
Invariably, the push to have a benefit treated as a member benefit rather than a death benefit arises because of the more favourable tax treatment. For members over 60 or with a terminal illness, lump sum payments are tax-free, or more specifically they are non-assessable, non-exempt payments.
If the benefit is a death benefit and the ultimate recipients are non-tax dependants, a tax liability arises. Given the size of many affected benefits, the tax could be quite significant.
Often, the dilemma arises due to poor planning or delays in withdrawing benefits as a member nears end of life. This is particularly challenging for attorneys managing the affairs of members who lose capacity or face sudden, unexpected demise. When a member dies before liquidating the fund assets, advisors must question whether the post-death payment can still qualify as a member benefit eligible for more favourable tax treatment.
2. what the ATO says about member benefits vs death benefits
The ATO has 2 guidelines on the issue: “Death of a Member” [QC 42473] and “Paying superannuation death benefits” [QC 45254]. Both contain identical wording under the heading of “Death benefit or member benefit”.
Without providing any authority, the material says that:
- “If a member requested an amount to be paid from their fund before they died, but died before they received it, it may be a member benefit in some limited cases.”
- “At the time of payment, the trustee must assess whether it is a member or death benefit based on the facts known at the time, including:
- terms of the request from the member
- terms of the trust deed and any other governing rules
- knowledge at the time the payment is made [including whether they are aware that the member has died]
- the entity that the payment is being paid to
- circumstances and timing of the payment
- whether the payment is made because of and in line with the request made by the member.”
In various PBRs on the issue, the ATO recites these same statements as the basis for deciding on a particular arrangement. For self managed superannuation funds [SMSFs], the challenge is having the ATO acknowledge that a benefit payment post-death should be a member benefit. This arises because the trustee typically has knowledge at the time of payment that the member has died. That was the situation in PBR 1052179436983, where the member’s attorney, who was the trustee of the fund, sought to have assets liquidated and pre-death benefit payment. Unfortunately, the member died before the payment could be made. The ATO relied heavily on the fact that the trustee was aware of the member’s death at the time of payment as the basis for concluding the benefit was a death benefit.
Rulings for APRA funds have tended to be more favourable, with the ATO seemingly more prepared to accept a payment as a member benefit, largely because the trustee was not aware of the member’s death at the time of payment. 
The ATO has ruled favourably for an SMSF. In PBR 1052132966588, as in PBR 1052179436983, it was the member’s attorney [who was also the director of the trustee] who instigated the payment process. Some amounts were paid before the member’s death, while others were paid after. The ATO ruled that it was considered a member benefit primarily because the process had progressed significantly and “could not automatically be stopped”.
3. what the law says about member benefit vs death benefit
One point that seems to be overlooked in all of this is what the legislation says. Section 307-5 of the Income Tax Assessment Act 1997 [ITAA97] is the starting point [and is referred to in all the PBRs]. The relevant part of the section is extracted below:
|Types of superannuation benefits
Superannuation benefit type
Superannuation member benefit
Superannuation death benefit
|superannuation fund payment
|A payment to you from a * superannuation fund because you are a fund member.
|A payment to you from a superannuation fund, after another person‘s death, because the other person was a fund member.
Seeking to argue that a benefit payment is a member benefit becomes problematic given that once a member has died, there can never be a payment to the member from a superannuation fund.
4. is there an alternative approach or argument?
There are 2 comments that could be made here.
The first is to organise a payment promptly when a member’s death is imminent. This might be done by an in specie transfer of assets to the member rather than the slower process of liquidating fund assets for a cash payment. In some instances, this may incur transfer duty, but may be a relatively small price to pay compared to the tax on a death benefit.
Another argument might centre on whether, once the member has done everything to call on the payment of their benefit, and the trustee has agreed to it , there has been a constructive payment, even if the actual payment hasn’t been made.
5. the upshot
Firstly, where a payment is made after the death of a member, any concession by the ATO to treat the payment as a member benefit, should be seen as a fortunate outcome considering the legal position. Given favourable rulings in the past, seeking a ruling may still be a viable option depending on the circumstances.
Second, APRA funds should not be afforded any more favourable treatment simply on the basis that the trustee was not aware of the member’s death at the time of payment. Ultimately, if a payment occurs post-death, it can only be a death benefit under the provisions of section 307-5.
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General advice disclaimer
The information provided in this article is a brief overview of the subject matter and does not constitute any type of advice. We endeavour to ensure that the information provided is accurate however, information may become outdated as legislation, policies, regulations and other considerations constantly change. Individuals must not rely on this information to make a financial, investment or legal decision and should consult an appropriate professional before making any decision.