SMSF Passing a House to the Estate Then to a Beneficiary. Who Pays the Tax!?!

Question

My questions relate to Super death benefits taxes, transfer costs, and deceased estates.

My father has an SMSF, for our purposes he is the only Member. He and I are the Trustees. I will be the executor of his estate.

You can assume:

The SMSF has large amounts of cash and shares, but the major asset is one lumpy property.
There is a current Binding Death Benefit Nomination, all to his estate.
All beneficiaries of the estate are adult non-dependants
There is about $200k in death benefits tax payable on the assets when transferred to the estate. $150k of that is for the property.
The transfer costs of the property (from the SMSF to the estate) is about that much again- $200k
The will does not say who pays the stamp duty / transfer costs or the death benefits taxes.
There should be no stamp duty / transfer costs when transferring the property (or any assets) out of the estate to each beneficiary under the will (s.124 Duties Act (Qld)).
His will leaves specific assets to specific beneficiaries, with the residuary to one specific beneficiary
The total of his cash bequests in the will is more than the amount of cash in the SMSF
The shares will cover the shortfall, with the rest of the shares falling into the residuary estate. The residuary estate will have about $300k in it, not counting any amounts needing to be deducted for death benefits taxes or transfer costs; if all of those are payable from the estate then the residuary assets cannot cover it.
The property is the only asset left to one of the beneficiaries in the will- with no cash bequest and no residuary left to that beneficiary, who has no cash of his own, so no way of paying any transfer duty or death benefit taxes. My understanding is that the estate has to pay the super death benefits taxes (on a lump sum, non-cash in specie distribution) on his behalf, as assessable income for the estate, meaning effectively they will come out of the residuary estate? If that tax paid is to then be “deducted” from that beneficiary’s share, how does the executor make an allowance (deduction) for the tax paid by the estate, when transferring the property in specie to the beneficiary?
The same situation applies to the cash and shares- who will pay the $50k death benefits tax (no transfer costs) and is it deducted from each of the beneficiaries’ bequests before payment?

Many thanks.
Adam

Answer

Adam,

Sorry for the delay in answering this question. I was hoping there was scope for claiming the beneficiary was presently entitled and that is a legal question so I had to get advice. Unfortunately, no luck. The “payment” from the SMSF will have to be taxed in the deceased estate but more about that later.

Assumptions:

Your father is over 60
All his beneficiaries are non dependent adults and none of them are his spouse
The SMSF deed actually allows for a transfer in species
There is a taxable component of your father’s superannuation. Note if a tax deduction was not claimed for the contributions to the fund then the return of that contribution is not taxable but the earnings and capital gain would be. If your father is under 75 and has a large taxable component then he should get advice on the whether a re-contribution strategy is suitable for his circumstances. According to last night’s budget he will not have to satisfy the work test after 1st July, 2022.

Answer:
A direct answer to the tax question is that the estate will have to pay the tax and that will of course come out of the residual amount. It is a legal question of how that is dealt with if there is a shortfall. The SMSF does not have to withhold any tax from the payment it makes to the estate but it needs to provide a PAYG statement (see link below) so you can see what is taxable. If the beneficiary of the estate is a non-dependant then the tax treatment of the death benefit payment should be as follows under section 302-140 and section 302-145:

The tax-free component (if any) is non-assessable non-exempt income and should not need to be reported on the tax return for the deceased estate;
The taxable component of the payment is included in the assessable income of the estate;
The trustee of the estate should be entitled to a tax offset to ensure that the rate of tax paid on the element taxed in the fund is capped at 15%; and
The trustee of the estate should be entitled to a tax offset to ensure that the rate of tax paid on the element untaxed in the fund is capped at 30%.

The estate pays this tax and the eventual beneficiary of the property has no liability at all.

Housekeeping:
This is the form the SMSF uses to make the payment https://www.ato.gov.au/uploadedFiles/Content/SPR/Forms/n70947_PAYG_payment_summary_Superannuation_lump_sum.pdf

The superannuation fund does not have to withhold tax from a lump sum payment made to a deceased estate. See page 2 here F2010L01472SMVOL33N01.pdf

There you go lots of information that will hopefully make you realise that you need to get advice on this and have a proper plan in place, maybe even a re contribution strategy.

A couple of other things to consider:
There is no CGT rollover when the property goes from the estate to the beneficiary so important this happens quickly so that no capital gain accrues while the property is held by the estate

There is a carve out for adult beneficiaries if there is an interdependent relationship for example living together and reliant on each other such as a carer.