No Death Benefits Tax?

No Death Benefits Tax?

As you know, there can be a significant difference in after tax benefits between a member withdrawal and a member death benefit payment. From age 60, member withdrawals are tax free but a death benefit payment from that same member account, if paid to a non tax dependant, will be reduced by 15% tax on the taxed taxable component, 30% on any untaxed taxable component and medicare (if paid directly to the beneficiary from the fund).

So what happens if a member lodges a valid withdrawal request with the fund trustee but dies before the payment is processed? Is that a member withdrawal or a death benefit? There have been several requests for rulings from the ATO from both APRA funds and SMSFs on this subject. The ATO’s response was to regard the payment as a member withdrawal in most cases – but not all. The difference seemed to be due to an inconsistent approach rather than a difference in circumstances.

At last week’s SMSF Association National Conference, Peter Burgess (SMSF Association Deputy CEO & Director of Policy & Education) announced that he had received verbal confirmation from the ATO that, provided a valid member withdrawal application had been received by the trustees prior to the member’s death, the benefit could be processed as a member withdrawal. It should be noted that no public announcement by the ATO has been made on this subject to date so I would still advise caution.

In addition, if this is confirmed, I’m sure we will see a deal of comment regarding the legal position where a valid binding death benefit nomination directs the benefit to someone other than a beneficiary of the estate.