Tax with Max: Paying out death benefits

Death benefits, contribution limits, and more.

Summary: This article provides answers on paying out death benefits from a fund, allowed contribution amounts when turning 60, accessing superannuation at age 60, the 45-day rule, converting a super account back to accumulation phase, and allocating franking credits within a SMSF.
Key take-out: The regulations relating to a super fund paying out benefits on the death of a member differ depending on who they must be paid to.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Paying out death benefits from a fund

I am concerned with respect to a two member SMSF that upon the death of one member a death benefit has to be paid out in the form of cash. Is this a legal requirement, and if so what provision imposes the requirement? Can the benefit be paid by way of an in-specie distribution of assets assuming the trust deed allows for that?

If the death benefit is paid to a surviving member (the spouse), can the recipient of the benefit elect to receive the benefit by an internal allocation of the member balance (entitlement) of the deceased member within the fund, either in whole or in part?

What if the fund owns property and does not have ready cash to pay a benefit and the surviving member wants to internally transfer or contribute the benefit back into the fund (if that is necessary)? Hopefully the property does not need to be sold just to realise cash which will then be contributed back into the fund by the surviving spouse.

Answer: The regulations relating to a super fund paying out benefits on the death of a member differ depending on who they must be paid to. Where the benefits are to be paid to a non-dependent they must be paid as soon as practicable. There is no stated time period that this must happen but will depend on the length of time it takes to sell the assets required to pay out the benefit.

Where a trust deed permits its benefits can be paid in the form of an in-specie transfer. This could mean if an SMSF owned a property, and a member dies, the beneficiary that will receive that member’s superannuation is a non-dependent, so the property could be transferred from the name of the SMSF to the name of the beneficiary.

Where the person who will receive the superannuation benefits is a dependent of the deceased member no assets need to be sold as the deceased member’s entitlement can stay in the fund. Where a pension was being paid to the deceased member that pension could continue to be paid if it was a reversionary pension, or the death benefit can be paid as a pension death benefit.

Allowed contribution amounts when turning 60

I am 59, currently working full-time earning around $100,000 per year. I have salary sacrificed up to the limit for the last few years but I have received conflicting advice as to how much I can sacrifice this financial year 2013-14 as I am turning 60 next March. Is it $25,000 or $35,000 (including the SG)? Did you need to be 60 before the beginning of the 2013-14 financial year in order to sacrifice the higher amount?

Answer: The maximum amount that can be contributed for concessional contributions this year, including employer superannuation guarantee contributions, is $35,000. The legislation allowing the increased contribution has been drafted in a clever way. Rather than the age of the person at the end of the year determining whether they qualify, the legislation has stipulated it is the age of the person at the start of the financial year. In this case anyone who was 59 at July 1, 2013 is eligible for the $35,000 contribution level.

Accessing superannuation at age 60

I am 38 years old. During the GFC I put a lot of extra money into my super fund, not an SMSF but just a basic AMP fund as I knew shares were low and I would not have the temptation to touch it. Since then the money has started to grow and I have consistently made extra contributions along the way. If I was to keep doing this, I should be in for a more than comfortable retirement.

As long as I am not working can I access this money as soon as I turn 60? I definitely don’t want to keep working until I am 65 or 67 as I have worked and saved hard to enjoy a good retirement so I want to reap the benefits for as long as possible rather than wait. So, as long as I don’t have a job at the age of 60, can I access it in full?

Answer: To be able to access superannuation you must meet a condition of release. One way that you can do this is to reach retirement age and retire. To meet the retirement condition of release you must have retired, which means not working more than 10 hours a week. For people who are 60 and over, another condition of release is ceasing employment with an employer.

The final condition of release that you could meet, if you still want to work full-time after having turned 60, is to start receiving a transition to retirement pension. This means you can continue with your employer, cut back your hours, but receive a pension to help balance your budget from your superannuation fund that is tax-free. So, in fact, you have three different ways in which you can access your super when you turn 60.

Is the 45-day rule really the 47-day rule?

Is it true that the day of purchase and the day of sale cannot be included as part of the 45 days, so the holding period to be eligible for the franking credits is actually 47 days?

Answer: Yes, this is the case, to be sure to obtain the franking credits a share should be held for at least 47 days.

Converting a super account back to accumulation phase

I am doing some long range planning. If I were to put my SMSF into pension mode after age 60, then at 65 be not working and unable to meet the work test, can I have my fund revert to accumulation mode?

Answer: When a superannuation fund is in pension mode there is nothing stopping a member commuting the pension and converting their superannuation account back into accumulation phase. This ability to start and stop a pension within a superannuation fund can be used to maximise the tax free component of a person’s superannuation. In your case there will be nothing stopping you reverting back to accumulation phase whenever you want after having started a pension.

Allocating franking credits within a SMSF

Our SMSF has an accumulation member who has not reached retirement age and a member who is receiving an account-based pension. The assets of the entire fund have been segregated, so that we know which bank accounts and assets apply to the accumulation part and which bank accounts and assets apply to the ABP. Of course, all the ABP interest, dividends and other income is tax-free, therefore any franking credits resulting from ABP shareholdings have no effect on the tax liability of the ABP income.

Could you please advise whether franking credits resulting from dividends earned by shareholdings that have been segregated in a SMSF for the purpose of generating income for a ABP can be applied to the SMSF as a whole? It seems that these franking credits could be going to waste.

Answer: From an accounting and an income tax point of view the member who is in pension phase will not lose the benefit of the franking credits. The franking credits will still appear on the income tax return for the super fund and the fund will receive a credit against the income tax payable in that year.

However, within the accounts of the super fund the franking credits will need to have been shown as belonging to the member in pension phase. This means that the member in pension phase has the benefit of the franking credits added to their account, while the member in accumulation phase has the full cost of the income tax payable debited to their account.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au