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April 2006
Can SMSFs with individual trustees pay retirement benefits as lump sums?

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Resources » ClearLaw legal bulletin » Superannuation » Can SMSFs with individual trustees pay retirement benefits as lump sums?
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Bernie O'SullivanBernie O'Sullivan
Partner of Maddocks
Phone: 03 9288 0555

Bernie specialises in all areas of superannuation, managed investments, trusts and estate and business succession planning.

Before joining Maddocks Bernie was a senior associate in the Melbourne office of Mallesons Stephen Jaques. Prior to this he was State Manager, New South Wales, for a major trustee company.

Bernie has a unique combination of extensive practical experience in the marketing and sale of financial and trust services as well as a thorough understanding of the legislation underpinning such services. Bernie specialises primarily in superannuation and managed investments and succession planning and trusts.

Bernie advises leading financial institutions, statutory trustee companies, superannuation fund trustees, accountants, financial advisers and high net worth individuals.

Bernie is secretary of the ASFA Compliance Discussion Group (Victoria), a member of the Taxation Institute of Australia's Education Committee (Victoria), chair of the Securities Institute of Australia's Graduate Diploma taskforce 'Risk Management and Estate Planning'. He is a lecturer and examiner for the Securities Institute and presents extensively for the Taxation Institute of Australia, Financial Planning Association and Australian Society of CPA's on topics such as superannuation, business and estate succession planning and trust law developments.

Maddocks
Recently, the ATO indicated that superannuation funds with individuals as trustees may pay benefits as lump sums (without first starting to pay a pension). The ATO seems to have provided some clarification.
Paul Ellis

Until now there was a view that:

  • these funds could not pay lump sums due to constitutional law considerations and the ATO's refusal to state a view; and
  • the only way for these funds to pay a lump sum was to start a pension and then commute the pension to a lump sum (but first the members had to be paid the minimum amount required to be paid as a pension for the relevant year).

Cleardocs deed updated

In light of the ATO's comments, Cleardocs has changed the SMSF trust deed to give the trustee a discretion to pay a benefit as a lump sum (without the need to commence a pension) even if the fund's trustees are individuals.

Should you consider updating a fund's deed to take advantage of this change?

Funds with members who are close to reaching pension phase (and who might wish to take a lump sum instead of a pension) should consider updating their deed — even if it is just for this reason alone.

However, there is no need to update for this reason if the fund:

  • has a corporate trustee — the fund already has the power to pay a lump sum; or
  • is not close to commencing a pension.

The original position

Previously, the commonly held view was that the only way for an SMSF with individual trustees to pay benefits as a lump sum was to start a pension and then commute the pension to a lump sum — but first the members had to be paid the minimum amount required to be paid as a pension for the relevant year.

This view was held because for a superannuation fund to qualify as a regulated superannuation fund, its trustee must either be a constitutional corporation, or its governing rules (the trust deed), must provide that the sole or primary purpose of the fund is to provide old-age pensions (as opposed to lump sums) — see section 19(3) of the Superannuation Industry (Supervision) Act 1993 (SISA)

The clarification from the ATO

On 8 February 2006, the National Tax Liaison Group Superannuation Sub Committee asked the ATO to clarify the position. Although the ATO fell short of giving a clear endorsement, it stated that:

  1. section 19 does not require the trustee to start a pension before providing a lump sum benefit;
  2. the rules of the fund must provide that the fund's objective intention is to pay a pension; and
  3. the lump sum must be paid in accordance with the fund's governing rules.

The ATO also touches on the issue in its recently updated publication Self Managed Superannuation Funds ?Äì Role and responsibilities of trustees (NAT 11032-11.2005). The publication states that a fund with individual trustees must state that the fund was established for the sole or primary purpose of providing old age pensions — but the publication also states that this does not prevent the fund from paying lump sum benefits providing the trust deed allows for this.

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