The ATO has made a significant concession regarding death benefit pensions in Practical Compliance Guideline (PCG) 2017/6, and advisers should be aware – and taking advantage – of it where appropriate, says Cooper Grace Ward partner Scott Hay-Bartlem.
‘The transfer balance cap rules still apply to death benefit pensions,’ explains Mr Hay-Bartlem. ‘However, a death benefit pension that started before 1 July 2017 continues to be a death benefit, so any commutation of a death benefit pension can only be to a lump sum. The recipient cannot commute any part of the death benefit pension back to accumulation phase.
‘This means the balance of a death benefit pension over the transfer balance cap at 1 July 2017 must leave the superannuation system as a lump sum, and cannot be commuted back to accumulation phase.
‘This has led to some confusion and concerns about past industry practices for dealing with death benefit pensions, particularly where it is not easy to separate the member’s own funds from their death benefit pension.
‘However, in PCG 2017/6, the ATO says it will not take any action where the amount over the transfer balance cap in a death benefit pension is commuted back to accumulation phase for the recipient (as opposed to being paid as a lump sum) if:
- the recipient was the spouse of the deceased at their date of death
- the commutation occurs before 1 July 2017; and
- the lump sum is a member benefit under section 307-5(3), which contains the times that must elapse after death before the commutation occurs (broadly more than six months after death and three months after probate is granted, unless there are delays in payment for particular reasons or the ATO has extended it).
‘This provides a significant, one-off opportunity for recipients of death benefit pensions to leave the excess over the transfer balance cap within the superannuation system, rather than forcing it out as a lump sum. In some cases, this can result in a significant amount remaining in the superannuation system where otherwise it may be forced outside.
‘The same relief has not been provided for other death benefit pensions, such as child pensions.’