A recent ATO private ruling considered the implications of withdrawing superannuation when a member is terminally ill.
Before passing away, the deceased gave instructions to the trustee to withdraw her entire balance from superannuation. Her superannuation consisted of a term deposit that would mature the following month. The trustee needed to give the bank notice to break the term deposit and interest penalties would apply.
As the difference between the notice period and the maturity date was only a number of days, the trustee decided to wait until the term deposit matured. However, the deceased passed away before this could occur.
The question for the Commissioner was whether the payments should be treated as a member’s death benefit or rather a withdrawal benefit because instructions were given before her death.
A member benefit is a payment to the member from a superannuation fund during their lifetime. Lump-sum payments to a member who is terminally ill will generally be tax-free.
A death benefit is a payment made after the member’s death from a superannuation fund to a beneficiary. Different tax treatment applies depending on whether the beneficiaries are ‘tax dependents’ (ie spouses, children under the age of 18 and other financial dependents). Lump-sum death benefits paid to tax dependents are tax-free. For non-tax dependants, any taxable component of the lump sum is subject to tax.
The Commissioner held that any payments made after the deceased’s death were a death benefit, regardless of whether withdrawal instructions were given before death.
In this case, all the beneficiaries were non-tax dependents and tax was payable on the death benefit. It is a real possibility that the resulting tax liability for the beneficiaries exceeded the penalties for breaking the term deposit early.
Hence, the moral of the story is not to wait for a term deposit to mature if a member is terminally ill. The funds should be withdrawn during the member’s lifetime (so as soon as possible), in order to avoid potential tax implications.
Click here for the full ruling.
Seeking advice on superannuation, financial planning or estate planning? Contact your Roberts & Morrow advisor.