Death Bed benefit withdrawals: What are they? Are they effective? What about the ATO?

What are they?

Death Bed benefit withdrawals is a poignant description of the situation where a member of a superannuation fund makes a request to withdrawal their superannuation benefit as a lump sum before they die.  Typically, this is done as the member has no dependants who could receive the benefit tax free.  If a superannuation death benefit is paid to the independent adult children of the member, the benefit will generally be taxed at 17% (including medicare).

Consider Augustus, a widower, who has adult children, Tarquin and Flavia.  His benefit in his self managed superannuation fund is $900,000 which consists of a $50,000 tax free component and $850,000 taxable component.  As Augustus is now aged 85, he could withdraw his entire superannuation benefit of $900,000 tax free.  However, if Augustus dies before withdrawing his entire superannuation benefit, the benefit, if paid to Tarquin and Flavia (in equal proportions), will attract a tax bill of $144,500 (that is 17% of $850,000 – there is no tax on the $50,000 tax free component).  Augustus, by acting quickly, could “save” or more correctly, preclude his children from incurring this tax.

This different treatment of the superannuation benefit arises merely because, on one hand, the benefit is paid to Augustus and on the other hand, the benefit is paid to his children (or his estate).

The natural desire of any parent to assist their children by not incurring unnecessary tax on their superannuation benefit is the reason for the timely withdrawal of superannuation benefits otherwise known as “death bed benefit withdrawals”.

Are they effective?

If a member has a right to request payment of their superannuation benefit say, because they have an attained age of 65 or more or are retired for superannuation purposes, and they exercise that right and the trustee of the superannuation fund authorises payment of the benefit request, then the death bed benefit withdrawal should be treated for taxation purposes as a superannuation member benefit (and therefore tax free) rather than a superannuation death benefit (and possibly be subject to 17% on the taxable component of the death benefit).

The critical issues are whether the member has a right to immediate benefit payment, whether that right has been exercised and finally whether the trustee/s have authorised payment of the benefit request.  If all these issues are satisfied, then the mere fact that the payment is made after the death of the member would not, by itself, cause the payment to be treated as a superannuation death benefit.

A member will have a right to immediate benefit payment if the trust deed (or governing rules) of the superannuation fund provide that the benefit can be paid to the member and payment to the member will not be inconsistent with the benefit payment standards applying to regulated superannuation funds.

A member will have exercised their right to immediate benefit payment if they have completed the relevant benefit payment request (signed, dated, provided bank account details for the payment and any other requirements).

The trustee will have authorised payment of the benefit if the completed benefit payment request form has been provided to the trustee and the trustee has resolved to authorise payment of the benefit and to authorise the taking of any administrative steps necessary to effect payment.

Once the trustee authorisation has occurred the relationship between the member and the trustee will have changed from a beneficiary/trustee relationship to a creditor/debtor relationship.  The payment of the benefit will then discharge the debt owed by the trustee to the member.

If the member has died after trustee authorisation has occurred but before payment has been made the payment will be a superannuation member benefit and will form part of the estate of the member:  trustee authorisation of the benefit request means that the trustee is now a debtor to the member and the subsequent payment is the satisfaction of the debt.

If the member had died before trustee authorisation of the request has occurred and the death of the member is not known to the trustee (this would typically be the case in respect of APRA regulated superannuation funds – such as industry funds or retail funds) then the authorisation post death by the trustee the subsequent payment pursuant to that authorisation would not cause the payment to be a superannuation death benefit.

However, if the member died before trustee authorisation of the request has occurred and the death of the member is either known to the trustee or the death of the member precludes the trustee from acting (because the member was a trustee or a director of the corporate trustee) – it is likely that any subsequent payment of the benefit would be a superannuation death benefit.

What about the ATO?

The ATO has raised concerns earlier this year about undated but signed benefit withdrawal forms being used to argue that a benefit payment made after the death of the member should be treated as a member benefit rather than a death benefit.   The view of the ATO is that the signed but undated requests are not, of themselves, sufficient to make a subsequent benefit payments tax free member benefits.  This is because the signed and undated benefit withdrawal request has not been authorised by the member before their death.

If the member has authorised the benefit withdrawal before their death (by both signing and dating the request) and trustee authorisation has been obtained then the subsequent payment of the benefit after the death of the member but pursuant to that trustee authorisation should not cause the benefit payment to be treated as a death benefit.

In conclusion

All roads lead to Augustus, but not if Augustus has completed the benefit withdrawal request and the benefit withdrawal request is approved by the trustee (including Augustus if he is either trustee or director of the corporate trustee).  Merely paying the benefit after the death of Augustus will not cause the benefit payment to be taxed as a death benefit.  The benefit payment will be tax free but form part of Augustus’ Estate.

_{NOTE:  This article was prepared as at June 2023.  The article has not been updated in light of subsequent developments}