Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 204

SMSFs must fix death benefit pensions now

In response to uncertainty about the commutation options available to SMSF members who are in receipt of a death benefit pension, the ATO has released guidelines which set out a practical administrative approach.

[Editor’s note: a commutation is an exchange or a conversion. In a superannuation context, it usually means converting an income stream to a lump sum or another income stream].

Background

On the death of a superannuation fund member, the trustee(s) of the fund are required to pay out the deceased member’s superannuation benefit as soon as practicable.

For dependants of the deceased, a superannuation death benefit can be paid out:

  • As a lump sum
  • As death benefit income streams that are retained in the superannuation system, or
  • A combination of the two.

Based on previously issued ATO public guidance materials, industry participants have inferred that on the expiration of the ‘death benefit period’, the spouse of a deceased member is able to commute a death benefit income stream and retain this amount as their own accumulation interest in the fund, or in another fund, without the need to immediately cash-out that benefit.

The ‘death benefit period’ is the latest of:

  • 6 months after the death of the deceased person, and
  • 3 months after the grant of probate of the deceased member’s will or letters of administration of the deceased member’s estate.

The ATO’s view is that the commutation of the pension by a spouse does not change the trustee’s requirement to pay out the deceased member’s superannuation interest as soon as practicable.

If the death benefit income stream is commuted, the trustee must immediately pay out the deceased member’s death benefit as a lump sum or as a new death benefit income stream. The requirement to pay out the benefit is not satisfied if the spouse retains this amount in the accumulation phase of the fund, or is rolled over and retained in the accumulation phase of another fund.

ATO compliance approach

Recognising the practical difficulties that many funds will face in identifying and paying out superannuation death benefits, the ATO will not apply compliance resources to review whether a SMSF has complied with the cashing rules provided that:

  • The member of the SMSF was the spouse of the deceased on the deceased’s date of death, and
  • The commutation and roll-over of the death benefit income stream is made before 1 July 2017, and
  • The superannuation lump sum paid from the commutation is a member benefit for income tax purposes because it is being paid after the expiration of the death benefit period.

Relevance to the $1.6 million transfer balance cap

The ability to retain these amounts in a superannuation fund is particularly relevant to individuals who may have superannuation income stream balances in excess of $1.6 million and who are required to commute the excess amount on or before 30 June 2017 to comply with the $1.6 million transfer balance cap. Rather than needing to withdraw any excess income stream amounts that relate to a death benefit income stream (which is outside the death benefit period), these amounts can be retained in the fund.

 

Peter Burgess is General Manager, Technical Services and Education at SuperConcepts, a leading provider of innovative SMSF services, training and administration. This article is for general information only and does not consider the circumstances of any individual.


 

Leave a Comment:

RELATED ARTICLES

Five things SMSF trustees should consider right now

How to preserve estate money in super

Is Gen X ready for retirement?

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.