Can death benefits be paid by journal entry? The ATO releases ATO ID 2015/2 and ATO ID 2015/3

Many have wanted to pay superannuation benefits — particularly death benefits — by way of mere journal entry.

The ATO have clarified their position in this regard by publishing two interpretive decisions on Friday, namely, ATO Interpretive Decision ATO ID 2015/2 and ATO Interpretive Decision ATO ID 2015/3.

The facts

Each of ATO ID 2015/2 and ATO ID 2015/3 consider essentially identical facts, namely:

The benefits of the deceased member consisted of publicly listed shares and cash.

The [spouse of the deceased and other member of the SMSF] wishes to remain in the fund and to re-contribute the death benefit directly to their member account. In order to avoid transaction fees, the [spouse] wishes to know whether it is possible to transfer the monies from the deceased member’s account to the taxpayer’s own account by way of journal entry.

However, ATO ID 2015/2 and ATO ID 2015/3 each answer somewhat different questions. In ATO ID 2015/2, the ATO considers whether the facts constitute a payment of a ‘superannuation death benefit’ for the purposes of s 307-5(1) of the Income Tax Assessment Act 1997 (Cth). In ATO ID 2015/3, the ATO considers whether the facts constitute a payment for the purposes of reg 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (Cth).

The decisions

The ATO answers the questions in both ATO ID 2015/2 and ATO ID 2015/3 with a no.

In ATO ID 2015/3, the ATO links payment with cashing, stating:

… cashing involves an SMSF making a payment which reduces the member’s benefits in the fund’. Consequently, transferring the shares and cash to the taxpayer’s account from the deceased member’s account via a journal entry would not amount to ‘cashing’ the benefits, and therefore, regulation 6.21 of SISR would not be satisfied.

The reasoning in ATO ID 2015/2 raises a more interesting question. In ATO ID 2015/2, the ATO canvasses what is commonly referred to as the principle in Spargo’s case (which is more formally known as Re Harmony & Montague Tin and Copper Mining Co (1873) LR 8 Ch 407). The ATO describes this principle as follows:

In Spargo’s it was held that a payment will occur where two parties both have a present liability or legal obligation to the other (mutual liabilities or mutual obligations) and they make an agreement and set off the liabilities against each other using a book entry.

Dixon J of the High Court of Australia expressed the principle as follows (Commissioner of Taxation v Steeves Agnew & Co (Vict) Pty Ltd (1951) 82 CLR 408):

If cross-liabilities in sums certain of equal amounts immediately payable are mutually extinguished by an agreed set-off, that amounts to payment for most common-law and statutory purposes.

The ATO determined in ATO ID 2015/3 that the principle did not apply, noting that:

Based on the principle in Spargo’s, a journal entry will only constitute a payment if there are mutual liabilities between the taxpayer and the SMSF and there is an agreement between those parties to set-off the liabilities. There is not a mutual liability in this case as the taxpayer does not have a liability to the SMSF

This raises a very interesting question: when will there be a mutuality of liabilities sufficient for the principle in Spargo’s case to apply?

Other applications of Spargo’s case

Consider an SMSF that has invested in a unit trust. The unit trust declares a distribution in favour of the SMSF. The SMSF then directs the unit trust to apply the unpaid distribution on the SMSF’s behalf by way of reinvesting in the unit trust.

Would the ATO accept that the principle in Spargo’s case applies here so that the SMSF ‘received’ the distribution (although in a literal sense the SMSF did not receive the distribution)?

The short answer is yes, the ATO would and do. More specifically, in Self Managed Superannuation Funds Determination SMSFD 2007/1 the ATO states:

… if an SMSF has requested that a dividend or trust distribution amount be applied or dealt with in some way on its behalf, the SMSF is taken to have received that amount as soon as it has been applied or dealt with as requested. For example, if a dividend or trust distribution amount is to be reinvested in the company or trust respectively, the amount is received by the SMSF when the amount is appropriated for the purchase of additional shares or units, as appropriate. If a dividend or trust distribution amount is to be set-off against a liability owing by the SMSF to the company or trust respectively, the amount is received by the SMSF as soon as the set-off happens.

The footnote to this paragraph states:

This is consistent with FC of T v. Steeves Agnew & Co (Vic) Pty Ltd (1951) 82 CLR 408 and Re Harmony and Montague Tin & Copper Mining (Spargo’s case) (1873) LR 8 Ch App 407; [1861-73] All ER Rep 261, which establish that an amount set-off constitutes money paid.

How to reconcile the two

From reading ATO ID 2015/3 it is not readily obvious how it can be reconciled with SMSFD 2007/1. However, possibly, if in ATO ID 2015/3 the re-contributing member had executed a deed creating a liability to contribute and then offsetting the liability against the SMSF’s obligation to pay, the ATO’s response might have been different.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.