By Monica Rule

In Law Central Bulletin 499, I explained what a “Superannuation Contribution” is and when it is considered to have been made to an SMSF.  In this Bulletin, I will explain how a superannuation benefit can be paid from an SMSF. 

Once an SMSF member has satisfied a condition of release under the superannuation law, such as reaching their preservation age or reaching the age of 65, they can access their superannuation savings from their SMSF.  As to whether their superannuation entitlement is paid as a lump sum or an income stream (such as a pension) will depend on the SMSF’s Trust Deed.  

A lump sum superannuation benefit is normally a one-time payment; whereas, an income stream benefit is a series of periodic payments made over an identifiable period of time, either at the same interval or in recurring intervals (e.g. weekly, monthly, quarterly, half yearly or annually). 

A lump sum superannuation benefit can be paid either in cash or in-specie but an income stream superannuation benefit can only be paid in cash. This is because the definition of a “lump sum” under the superannuation law includes an asset.  However, there is no equivalent definition for an income stream.

Under the income tax law, when an income stream is partially commuted, the member or a dependant beneficiary may make an election for the payment of the partial commutation not to be treated as an income stream benefit and instead have it treated as a lump sum benefit.  Therefore, if the election is made, the payment from the partial commutation of an income stream is a superannuation lump sum for income tax purposes and the lump sum can be paid either in-specie or in cash and taxed as a lump sum superannuation benefit.  If the election is not made, then the payment is a superannuation income stream benefit and cannot be paid in-specie. 

Can a lump sum benefit be paid in instalments?

A lump sum superannuation benefit can be paid in any instalments as long as the member has met a condition of release and is entitled to access their benefit from their SMSF.  However, when it comes to the payment of a lump sum death benefit to the deceased’s beneficiaries, the superannuation law requires the death benefit to be paid either as a single lump sum, or an interim lump sum and a final lump sum. This means, a lump sum death benefit can only be paid in one or two instalments. An SMSF cannot “drip feed” death benefits to beneficiaries when the SMSF’s assets are sold and cash becomes available.

Can a superannuation benefit be made using a journal entry?

The term “payment” is not defined in the law.  Court cases have confirmed that a payment normally occurs where two parties both have a present liability or legal obligation to the other and by agreement they set off the liabilities against each other using a book entry.  However, where an SMSF has a present obligation to pay a member or a beneficiary either a superannuation income stream or a lump sum, there is no present obligation or liability to the SMSF on the part of the member or the beneficiary and therefore no mutual obligation exists.  As a result, a superannuation benefit cannot be made with a journal entry.

The Tax Office has stated in Interpretative Decision 2015/23 that where the benefits of a deceased member of an SMSF are to be paid as a death benefit to the deceased’s beneficiary, the superannuation law does not allow the benefit to be transferred to the beneficiary’s superannuation account simply by way of journal entries in the books of the SMSF.  The death benefit must actually be paid to the beneficiary by transfer of ownership of the deceased member’s assets to the beneficiary.  This means payment involves an SMSF making a cash or in-specie payment that reduces the member’s benefit in the SMSF.  Transferring assets or cash to the beneficiary’s superannuation account from the deceased member’s superannuation account via a journal entry would not amount to cashing benefits and does not satisfy the law.

For Gold and Platinum Members, Monica has provided various scenarios of how to determine whether an SMSF has paid a superannuation benefit.

Monica Rule is an SMSF Specialist and author of The Self Managed Super Handbook – Superannuation Law for SMSFs on plain English www.monicarule.com.au

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Pension Pack for Self Managed Super
• Investment Strategy for Self Managed Super 16/17
• Derivative Risk Satement for SMSF

Related webinars:

• Webinar Recording - Pitfalls That SMSF Trustees Should Avoid
• Webinar Recording - SMSFs And Related Party Loans
• Webinar Recording - The Protected Super Myth’Conception
• Webinar Recording - Tips And Traps For Property Investment In Your SMSF