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Are death bed benefit super withdrawals effective?

Death bed benefit withdrawals is a poignant description of when a member of a superannuation fund makes a request to withdraw their superannuation benefit as a lump sum before they die. Typically, this is done as the member has no dependants who could receive the benefit tax free. If a superannuation death benefit is paid to the independent adult children of the member, the benefit will generally be taxed at 17% (including 2% Medicare).

Consider Augustus, a widower, who has adult children, Tarquin and Flavia. His benefit in his SMSF is $900,000 which consists of a $50,000 tax-free component and a $850,000 taxable component. As Augustus is now aged 85, he could withdraw his entire superannuation benefit of $900,000 tax free.

However, if Augustus dies before withdrawing his entire superannuation balance, the benefit if paid to Tarquin and Flavia (in equal proportions) will attract a tax bill of $144,500 (17% of $850,000, there is no tax on the $50,000 tax-free component). Augustus, by acting quickly, could ‘save’ or more correctly, preclude his children from incurring this $144,500 tax.

This different treatment of the superannuation benefit arises merely because, on one hand, the benefit is paid to Augustus and on the other hand, the benefit is paid to his children (or his estate).

The natural desire of any parent to assist their children by not incurring unnecessary tax on their superannuation benefit is the reason for the timely withdrawal of superannuation benefits otherwise known as ‘death bed benefit withdrawals’.

Are they effective, even after death of the member?

If a member has a right to request payment of their superannuation benefit say, because they have an attained age of 65 or more or are retired for superannuation purposes, and the trustee of the superannuation fund authorises payment of the benefit, then the death bed benefit withdrawal should be treated for taxation purposes as a superannuation member benefit and is tax free. Alternatively, a superannuation death benefit may be subject to a 17% tax on the taxable component of the death benefit.

The critical issues are whether:

  1. the member has a right to immediate benefit payment
  2. that right has been exercised, and
  3. the trustee has authorised payment of the benefit request.

If all these issues are satisfied, then the mere fact that the payment is made after the death of the member would not, by itself, cause the payment to be treated as a superannuation death benefit.

Let's consider each of the three conditions.

1. A member will have a right to immediate benefit payment if the trust deed (or governing rules) of the superannuation fund provide that the benefit can be paid to the member. Payment to the member should not be inconsistent with the benefit payment standards applying to regulated superannuation funds.

2. A member will have exercised their right to immediate benefit payment if they have completed the relevant benefit payment request (signed, dated, bank account details provided for the payment and any other requirements).

3. The trustee will have authorised payment of the benefit if the completed benefit payment request form has been provided to the trustee and the trustee has resolved to authorise payment of the benefit and to authorise the taking of any administrative steps necessary to effect payment.

Benefit relationships change

Once the trustee authorisation has occurred, the relationship between the member and the trustee changes from a beneficiary/trustee relationship to a creditor/debtor relationship. The payment of the benefit will then discharge the debt owed by the trustee to the member.

If the member has died after trustee authorisation has occurred but before payment has been made, the payment will be a superannuation member benefit and will form part of the estate of the member. 

If the member had died before trustee authorisation and the death of the member is not known to the trustee (this would typically be the case in respect of APRA regulated superannuation funds such as industry funds or retail funds) then the authorisation post-death by the trustee the subsequent payment pursuant to that authorisation would not cause the payment to be a superannuation death benefit.

However, if the member died before trustee authorisation of the request has occurred and the death of the member is either known to the trustee or the death of the member precludes the trustee from acting (because the member was a trustee or a director of the corporate trustee), it is likely that any subsequent payment of the benefit would be a superannuation death benefit.

What about the ATO?

The Australian Taxation Office (ATO) raised concerns earlier this year about undated but signed benefit withdrawal forms being used to argue that a benefit payment made after the death of the member should be treated as a member benefit rather than a death benefit.

The view of the ATO is that the signed but undated requests are not, of themselves, sufficient to make any subsequent benefit payments tax-free member benefits. This is because the signed and undated benefit withdrawal request has not been authorised by the member before their death.

If the member has authorised the benefit withdrawal before their death (by both signing and dating the request) and trustee authorisation has been obtained, then the subsequent payment of the benefit after the death of the member but pursuant to that trustee authorisation should not cause the benefit payment to be treated as a taxable death benefit.

In conclusion

All roads lead to Augustus, but not if Augustus has completed the benefit withdrawal request and the benefit withdrawal request is approved by the trustee. Merely paying the benefit after the death of Augustus will not cause the benefit payment to be taxed as a death benefit. The benefit payment will be tax-free but form part of Augustus’ estate.

 

Michael Hallinan is Executive Consultant – Self Managed Superannuation, for SUPERCentral, an independent online platform provider of SMSFs, advice, legal documentation and wealth management services to accounting and financial planning firms throughout Australia.

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

DISCLAIMER: Please note that these comments are for your consideration only and are provided to assist you in deciding whether to proceed to obtain a formal opinion on the issue. These comments cannot be relied upon by either you or any of your clients until and unless we issue that formal opinion.

 

19 Comments
Graeme Taylor
July 04, 2023

Q1 What is the position if the Joint EPAs have signed & dated the withdrawal before DOD and lodge say a day after death re the Super & AP balance?...& say the bank acc details have been advised to the trustees prior ?
Q2 Would this likely avoid the 17% tax with the benefit paid to the estate tax free ?

Would appreciate more clarity
Graeme Taylor

Gordon Lucas
July 03, 2023

Hi Michael, many thanks for the reminder of the need to make decisions afore the big fall from the perch. I wonder if you or another knowledgeable reader can confirm, or otherwise, the validity of the following strategy, please?
My wife & I have a SMSF with a corporate trustee. Trust Deed allowing, my idea is we make our two adult girls trustees of the fund and also members - well before our dotage. Would the fact our children have become trustees and members allow the SMSF to tick on after my wife and I depart thus leaving the fund operational sans a tax obligation?
Thanks,
Satisfied

Ramani
July 02, 2023

Our underworked High Court would be tied up in legal knots if the will provided the estate to be divided between adult children: 117% and the ATO the residual -17%.Tax karma…..!

Di
July 02, 2023

Very informative, but I'm enjoying the wit of fellow commenters :-)

Ramani
July 02, 2023

To all those quoting from their Book on the joy of giving to prodigals, beware of the time when ATO grabs its share of the estate, as revenue-seeking Treasurer of the future introduces direct death duties (on top of current the indirect 17% on bequests to tax non-dependents). The Commissioner of Taxation turning up as your (il)legitimate sibling smiling when the will is read. His will will be done!

Robert Burrows
June 30, 2023

Is there any benefit in changing my 'beneficiary details' over from my 'kids' names to the 'estate of Robert Burrows' -
in case of my sudden death!
Would the 'estate' then have to pay the tax on the 'Taxable component' of my super balance prior to the distribution of estate funds to my beneficiary's nominated in the will?

john
July 02, 2023

I believe that would not be treated differently. However someone 'more knowing' should be able to answer and clarify.

Ramani
July 03, 2023

I am not at all 'more knowing', John or Robert Burrows, but simply intrigued.
If the testator wanted the estate and not the adult children to bear the 17% tax on the super bequests, a lawyer could define the allocations to the children in the will as before, plus the 17% tax thereon as a non-super bequest. As there is (at present) no tax on such non-super bequest (or any gifts) this should work. The ATO shouldn't disturb this as long as they get their 17% on super.
Where there is a will there may not be a way, but a way could be found with a willing lawyer.
Time for a pro bono estate or tax lawyer to clarify (or await their brief)?

JBS
July 04, 2023

I'm fairly sure that whilst payments to non-dependants from a super fund attract 17% tax on the taxable component of your super, it is actually 15% tax and 2% Medicare levy. If paid to an Estate there is no Medicare levy. In either case, it is the super fund that deducts the tax & medicare levy, not the beneficiaries or the estate.

Malcolm
June 30, 2023

3. The trustee will have authorised payment of the benefit if the completed benefit payment request form has been provided to the trustee and the trustee has resolved to authorise payment of the benefit and to authorise the taking of any administrative steps necessary to effect payment.

What form should the “resolution to authorise payment” take. A signed and dated letter from the Trustee to the requestor?

Ramani
June 30, 2023

If clever Augustus envisages possible loss of mental capacity towards his life ebbs away and had appointed an Enduring Power of Attorney (perhaps an adult child), the EPOA can withdraw the super balance when Augustus is alive. Trustees have a fiduciary duty to act in the members’ best interests and so should act on the EPOA request.
Will this not work?

David Elliott
June 30, 2023

David In today’s world transactions occur online and transact immediately. Industry superannuation funds:To request a payment from your super or to transfer your account to another fund: Log into your online account • Choose 'Make a withdrawal from my super account'. Making your payment request online is easy and means that you can confirm your identity online.

JBS
July 04, 2023

1. To have this work, you need to have previously had your super fund approve the bank account.
2. All payments are made separately for superannuation Accumulation account and Pension Account, so you need to have both approve the bank account. Assuming you are being paid a pension, the easy way to have the Accumulation paid is to make a small withdrawal which then gets the fund to approved the bank account.

Glenn
June 30, 2023

If your name is Augustus and you’ve called your kids Tarquinius ( I mean… look what happened to him) and Flavia maybe the schoolyard boxing lessons will be a wise bequest.

Graham W
June 29, 2023

The older we get, the more likely we will have drawn a lot of our super tp pay a large RAD to a care provider. That is returned tax free to an estate, so the older we get the less likely this will be a problem. I agree also with CLK, I believe it was Confucious who said to give with a warm hand ,not a cold one.

jeff
June 29, 2023

Michael, In the case where a partner leaves his SMSF balance to his/ her partner via a Binding death benefit I would like to confirm that there would be no tax involved because the partner would be a dependent under Super?

Justin
July 03, 2023

Correct.

Depenents are tax free as it were.

Noting current and 2026 balance requirements.

David
June 29, 2023

Surely I can't be alone in wanting to know whether, irrespective of the tax paid on the benefit, Tarquin and Flavia spent Daddy's money wisely, or instead went on a dissolute bender with their respective partners, Porsche and Crispin.

CLK
June 29, 2023

David if we give with a cold hand we will never know & neither should we want to know by then:)

 

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