Tuesday, November 21, 2023

Walking the line** - understanding what does ‘cashed' means

View Legal blog - Walking the line** - understanding what does ‘cashed' means by Matthew Burgess

Last week’s post focused on the issue surrounding ensuring an SMSF maintains compliance following the death of a member.

One issue raised following that post related to how the superannuation rules work in the context of the requirement that a member’s benefits must be ‘cashed as soon as practicable’ after the death of a member, which is set out under the Superannuation Industry (Supervision) Regulations at regulation 6.21(1).

In particular, the question is whether a death benefit can be simply transferred to a surviving member’s account by way of journal entry.

In this regard, in most other areas of the law, where two parties owe mutual liabilities or obligations, they can be set off the liabilities against each other through a book entry (see our earlier post in relation to Spargo case).

The Tax Office has confirmed that the principle in Spargo’s case can also apply to SMSFs where there are mutual liabilities between the relevant fund and another party (see ATO ID 2015/2).

The Tax Office has confirmed in ATO ID 2015/3 however that a death benefit cannot be satisfied simply by way of journal entry, as death benefit dependants do not owe anything to the fund, that is there is no mutual liability to set off against the SMSF.

Therefore, death benefits must actually be paid to the death benefit dependant by the transfer of ownership of assets out of the SMSF.

The Tax Office also confirms that the Superannuation Industry (Supervision) Regulations do not allow for payments to be made to members by way of journal entry.

In particular, regulation 6.17(2) requires payments to be transferred out of the SMSF.

Unfortunately, this requirement for formal payment can in a practical sense trigger unnecessary transaction costs as well as complicating and delaying the death benefit payment process.

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** For the trainspotters, the title of today's post is riffed from the Johnny Cash song 'I walk the line'.

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