Distributing the main asset of the SMSF as a non-cash death benefit

Some SMSF's hold one or more sizeable assets — for example, a property (Property) - which generates income for its members through rental income. When a fund member dies and they have chosen to distribute their interest to their nominated beneficiary as a lump-sum and not as a pension, the question arises as to whether and how to give effect to the distribution.

Does the primary asset need to be sold off, and the cash distributed to the member's beneficiaries? Or can the relevant proportional interest in the asset itself can be transferred to the beneficiaries (i.e. in-specie distribution). And how does that work if the SMSF is to retain an interest in the Property?

This article will:

  • discuss the ability for an asset to be distributed in-specie to a nominated beneficiary; and
  • outline what this process usually involves.
 

Can you transfer the SMSF asset in-specie when paying a death benefit distribution?

In summary, yes - an in-specie distribution of the asset is permitted given that super law states that a 'lump-sum' payment includes a non-cash payment.

What does Superannuation Law say?

There is a general rule in regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) which requires that a super death benefit must be 'cashed' to a beneficiary as soon as possible after the member's death. In addition, subregulation 6.21(2) requires that [emphasis added]:

The form in which benefits may be cashed under this regulation is any one or more of the following forms:

(a) in respect of each person to whom benefits are cashed:

(i) a single lump sum;

(b) subject to subregulations (2A) and (2B):

(i) 1 or more pensions …

Accordingly, a deceased member's interest in Property can be 'cashed' as a 'lump-sum' or a 'pension'. This article will focus on 'cashing' death benefits as a 'lump sum'.

The term 'cashed' is not defined in Part 6 of the SISR. By virtue of other sections in the SISR [1], it is given its ordinary meaning as it is not otherwise defined in super law.

The deceased member's interest would be 'cashed', i.e. paid, as a 'lump sum' which is defined as follows:

in this Part but not in Schedule 1, includes an asset[2].

Therefore, the definition contemplates that a lump-sum payment can be made by way of transfer of a non cash lump sum i.e. an asset, provided that a super fund's governing documents allow it (and do not impose restrictions in this respect).

There is no further legislation or guidance from the ATO on the in-specie transfer of an SMSF asset as a death benefit distribution. It is generally accepted that an asset can be transferred in-specie upon the death of a member of an SMSF.

How is the in-specie distribution effected?

Accordingly, the process for payment of the death benefit would be as follows:

  • determine the percentage interests of all members of the fund;
  • the trustees transfer the deceased's percentage interest to the deceased's beneficiaries by transfer of land;
  • title is issued in the names of all parties, being the deceased's beneficiaries and the trustee(s) of the fund; and
  • each party can call for issue of a separate title representing their interest.

It is recommended that a co-ownership agreement be entered into between the deceased's beneficiaries and the remaining trustee(s) of the fund.

It is also important to be aware that there are tax and duty consequences when making an in-specie distribution of a member's proportional interest in the Property to their beneficiaries.

Are there possible complications?

Circumstances such as the following may lead to complications with the process above, which need to be carefully navigated:

  • the SMSF has individual trustees: on the death of an individual trustee, often there will only be one remaining trustee (ie, a surviving spouse). The first task is to appoint an additional individual trustee of the SMSF, or a replacement corporate trustee. This process of itself will require an amendment to the title of the Property;
  • the SMSF has a LRBA on foot in relation to the Property: this will complicate matters as the SMSF's financier will need to be involved, and consent to the distribution and how it is to be effected. Additionally, the beneficiaries may not be willing to assume personal liability for the loan repayment obligations under the financing arrangements.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

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[1] In order for the fund to be compliant with section 17A of the SIS Act the SMSF requires 2 individual trustees.

[2] regulation 6.01 Superannuation Industry (Supervision) Regulations 1994 (Cth).