Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 109

An SMSF journal entry is not enough

Some things in life are not easy and some things don’t make much sense. Unfortunately superannuation often falls into both categories.

Take the situation where a husband and wife have established an SMSF. After many years of managing their SMSF successfully and accumulating much wealth in their fund, the husband passes away.

Under the superannuation law, the death triggers a compulsory payment where the deceased member’s superannuation savings must be paid out as a lump sum death benefit either to a dependant or to his estate as soon as possible.

In this case, the wife does not need the lump sum death benefit payment as she has enough income without it. She would rather the money be retained in the SMSF. In fact if the lump sum payment is made to her, she would simply deposit the money back into her SMSF. So the wife, with the agreement of her accountant, records a journal entry in the SMSF’s financial accounts that reflects a lump sum death benefit was paid to her and then was deposited back into the SMSF.

Sounds fine, what’s the problem?

There was no problem in the wife being able to put the money back as she hasn’t exceeded her contribution caps and she also meets the work test in order to make contributions into her SMSF. So what is the problem?

Well, superannuation law requires the death benefit payment to be ‘cashed’. This means, it must be paid out of the SMSF. If assets need to be sold to fund the payment, that must be done. Once paid, it can then be contributed back into the SMSF if the recipient so wishes. You cannot simply make a journal entry without physically making the payment.

The ATO has recently issued two publications, ATOID 2015/2 and ATOID 2015/3 that address this issue. In these documents, the ATO explains that cashing involves an SMSF making a payment which reduces the member’s benefits in the fund. A journal entry to reduce the deceased’s member account would not amount to cashing, and therefore, would not satisfy the law.

Even if there are no tax implications, in order to comply with the superannuation law, a death benefit must be paid out. Otherwise you would have contravened the law. It’s a silly law and one that doesn’t make much sense to those who are already grieving the loss of a loved one.

 

Monica Rule is an SMSF Specialist and the author of The Self Managed Super Handbook – Superannuation Law for SMSFs in plain English – www.monicarule.com.au

6 Comments
Monica Rule
May 19, 2015

Ramani, you are correct.

There is nothing stopping a contribution being made using assets as long as it complies with all the superannuation law requirements. That is, it needs to be an asset that the SMSF is able to acquire from a member/beneficiary (therefore you need to be careful if the asset is not a business real property); the contributor needs to be a member of the SMSF; the contributor must meet the part time work test if over the age of 65 or more etc.

Ramani
May 15, 2015

Monica

Thanks for the response.

In regard to your answer about in specie payment of death benefits as a lump sum (probably supplemented with the anti-detriment clawback), I suppose nothing would preclude the same assets being contributed back to the SMSF (subject to contribution rules & governing rules allowing in-specie contributions or at least not prohibiting them, and the assets being stock-exchange listed)?

I accept that this is getting farcical, really, but compliance is sacrosanct compliance.

Bruce
May 15, 2015

Can you please advise me if the same requirement applies when a SMSF is in the pension phase and the beneficiary is a child under the age of 18?
What are the options when a fund is in the pension phase and the spouse is dependent on the income from the fund? If she is over 65 and not working she is limited as to what she can contribute back into the fund.
If the SMSF held its assets as equities/managed funds or property, would transferring these equities/managed funds/property to the wife on the death of the husband qualify as cashing out? Or is the only option a cash payment.

Monica Rule
May 15, 2015

Hi Bruce,

Yes, the same rule applies if the beneficiary is a child under the age of 18 and the deceased is in pension phase and a lump sum death benefit is required to be paid from the SMSF. However, if the requirement is for the child to continue to receive the pension, then pension payments would continue to be paid from the SMSF. There would be no need for a lump sum death benefit to be paid from the SMSF. The deceased’s superannuation savings will simply continue to be paid to the child.

Also, if the death benefit is to be paid to the surviving spouse as a continuation of the deceased’s pension, then the pension will continue to be paid to the dependent. This would not require a lump sum death benefit to be paid, and therefore, there is no need for money to be paid out from the SMSF and for the wife to be working to be able to contribute the money back.

A lump sum death benefit can be paid in-specie using assets of the SMSF. Therefore, cashing out includes payment of a lump sum benefit by transferring assets of the SMSF to dependents. The ATO would check for the legal ownership of assets transfer as evidence.

Ramani
May 15, 2015

Monica

A helpful guide to the need to pander to the silly nature of this requirement.

How would this work (or not) if the wife receiving a cheque endorses it (as she can under banking law, a cheque being a negotiable instrument) back to the Fund for making a contribution?

Monica Rule
May 15, 2015

Hi Ramani,

Regardless of whether the death benefit is paid by cash or cheque, what the ATO would be looking for is money leaving the SMSF’s bank account. The SMSF would need to show evidence of cash being available to pay out the death benefit and an entry in the SMSF’s bank account showing the money leaving the SMSF. The SMSF would also need to show evidence of the receipt of contributions from the wife with an entry in the SMSF’s bank account. If that can be achieved with a cheque endorsement, then I guess it is possible.

 

Leave a Comment:

     

RELATED ARTICLES

Ensure death benefit nominations are upheld

The impact of our marriage breakdown on our SMSF

SMSFs the new battleground in family disputes

banner

Most viewed in recent weeks

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

What were the big stockmarket listings in record 2021?

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.