ATO ID 2015/23: Superannuation: Member's benefits in a regulated superannuation fund must be 'cashed' upon death by being paid - mere journal entries insufficient
Date of decision: 5 August 2015
Business line: Superannuation

Issue
Where the benefits of a deceased member of a self-managed superannuation fund (SMSF) are to be paid as a lump sum to the deceased member's spouse, will the benefits be considered 'cashed' for the purposes of regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994 (SISR) if the amount of the benefits is simply debited from the deceased member's account and credited to the account of the spouse by way of journal entry in the fund's accounts?

Decision
No. Simply debiting the amount of the deceased member's benefits from the deceased member's account and crediting the account of the spouse with that amount by way of journal entry in the accounts of the SMSF does not constitute a 'payment', and therefore a 'cashing', of the deceased member's benefits as a lump sum to the spouse.

Facts
A regulated superannuation fund, being an SMSF, had two members, one of whom has died. The members were married to each other. The trustees of the SMSF have resolved to pay the deceased member's benefits to the spouse of the deceased member (the spouse) as a lump sum. This resolution is consistent with the governing rules of the fund and the SISR. The trustees of the SMSF propose to 'pay' the lump sum by debiting the amount of the deceased member's benefits from the deceased member's account and crediting the account of the spouse with that amount by way of journal entry in the accounts of the fund. The spouse has no present liability to pay an amount to the SMSF.

Reasons for decision
Summary: Part 6 of the SISR contains the 'payment standards' that apply to all regulated superannuation funds, and fund trustees, when paying a member's benefits in the fund. Division 6.2 of the SISR sets out the general rules governing the payment of such benefits. In broad terms, a member's benefits in a regulated superannuation fund can only be paid in one of the ways described in regulation 6.17 (in Division 6.2) of the SISR, that is, paid by being cashed, rolled over or transferred, or allotted as required by that regulation. Subparagraph 6.17(2)(a)(i) of the SISR specifically states that a member's benefits in a regulated superannuation fund may be 'paid' by being 'cashed' in accordance with Division 6.3 of the SISR. Division 6.3 of the SISR contains the rules for the cashing of a member's benefits in a regulated superannuation fund. Relevant in this context, regulation 6.21 of Division 6.3 of the SISR sets out the compulsory cashing requirements that apply on the death of a member. Subregulation 6.21(1) of the SISR provides that a member's benefits in a regulated superannuation fund must be 'cashed' as soon as practicable after the death of the member (unless, as is not the case here, the benefits are rolled over as soon as practicable for immediate 'cashing', in accordance with subregulation 6.21(3) of the SISR). Subregulation 6.21(2) of SISR goes on to prescribe the form in which the benefits may be cashed for the purposes of regulation 6.21 of SISR, subject to the additional restrictions in subregulations 6.21(2A) and (2B) of the SISR. In accordance with paragraph 6.21(2)(a) of the SISR, the benefits may be paid by being cashed as a single lump sum (or an interim and final lump sum). Relevantly in this case, subregulation 6.22(2) of the SISR permits such benefits to be paid in favour of a 'dependant' of the member (which, as defined in subsection 10(1) of the Superannuation Industry (Supervision) Act 1993 (SISA), includes a member's 'spouse'). The term 'cashed' is not defined in Part 6 of the SISR. However, by virtue of subregulation 6.01(1) of the SISR, it has the same meaning as the defined term in Part 5 of the SISR. Subregulation 5.01(1) in Part 5 of the SISR simply states that 'cashed' means cashed in accordance with Division 6.3 of the SISR. As 'cashed' is not otherwise defined for the purposes of the SISR and/or the SISA, the term is therefore given its ordinary meaning, having regard to the context and purpose of the provision in which it appears. The Macquarie Dictionary (6th Edition) relevantly defines the verb 'cash' as meaning 'to give or obtain cash for (a cheque, etc)'. Similarly, the Australian Oxford Dictionary (2nd Edition) describes it as meaning 'to give or obtain cash for (a note, cheque etc.)'. Having regard to the legislative scheme of Part 6 of the SISR, which contains the 'payment standards' that apply to the operation of all regulated superannuation funds and expressly provides that a member's benefits in a fund may be 'cashed by being paid', it is clear that the term 'cashed' as it is used in the SISR involves the 'payment' of a member's benefits. Furthermore, it is implied from the context in which the term 'cashed' appears in the SISR that in order for a member's benefits in a fund to be considered 'cashed' for the purposes of the SISR, including regulation 6.21 of the SISR, they need to be paid out of the superannuation system, not just moved within the system by being rolled over, transferred or allotted, as referred to in regulation 6.17 of the SISR. Self Managed Superannuation Funds Determination SMSFD 2011/1, which discusses 'cashing' in the context of benefits payable with a cheque or promissory note, confirms at paragraph 21 that: For the purposes of Division 6.3 of the SISR, 'cashing' involves a 'member's benefits in a fund' being 'paid'. This indicates that cashing involves an SMSF making a payment which reduces the member's benefits in the fund. The determination goes on to state at paragraph 22 that cashing involves an actual distribution of benefits from the fund. It follows that, in this case, for the deceased member's benefits in the fund to be considered 'cashed' as a lump sum to the spouse, there must be a 'payment' of the member's benefits in the fund to the spouse. It is well-established at common law that a 'payment' of money can be effected by way of agreed set-off between two parties, where those parties each have a presently existing liability or legal obligation to the other for a certain monetary amount immediately payable, and they agree to set off the liabilities against each other. In such circumstances, journal entries in the books of account of the parties to the transaction may record the payment of money from one party to the other by the agreed set-off. There does not have to be an actual exchange of monies between the parties in such circumstances. This general law principle of payment by 'set-off' has its foundation in the case of Re Harmony and Montague Tin & Copper Mining (1873) LR 8 Ch App 407 (Spargo's case). The principle in Spargo's case is not confined to the company law setting in which it was decided (East Finchley Pty Ltd v. Federal Commissioner of Taxation 89 ATC 5280; (1989) 20 ATR 1623). The case has been applied, and cited with approval, in a number of cases in the Australian taxation and superannuation context (for example, Federal Commissioner of Taxation v. Steeves Agnew & Co (Vict) Pty Ltd (1951) 82 CLR 408; [1951] HCA 26, Lend Lease Corporation Ltd v. Federal Commissioner of Taxation 90 ATC 4401; (1990) 21 ATR 402, Federal Commissioner of Taxation v. P Iori & Sons Pty Ltd (1987) 15 FCR 363; 87 ATC 4775; (1987) 19 ATR 201, Jarrett v. Perpetual Trustee Co Ltd (2007) 64 ACSR 552 and Case 18/97 97 ATC 227 (Case 18/97). These decisions make it clear that for the principle in Spargo's case to apply, there must be a mutuality of presently existing liabilities or obligations for a certain monetary amount immediately payable in existence between the relevant parties. For example, in Case 18/97, a member of a superannuation fund, who elected to apply their lump sum entitlement (being an amount equal to their 'accumulated credit' as defined in the fund's trust deed and comprised solely of deductible employer contributions) to the provision of a pension, argued before the Administrative Appeals Tribunal that there was an undeducted purchase price in relation to their pension. In deciding that there was no undeducted purchase price, the Tribunal held that the election to be paid a pension did not involve a 'set-off' of one obligation against another of the type referred to in Spargo's case. At the relevant point in time, there was only one obligation, being the trustee's obligation to provide the member with their 'accumulated credit'. The election caused the trustee to substitute one obligation (to pay a pension) for another pre-existing obligation (to pay a lump sum). The principle in Spargo's case had no application as there was never in existence two concurrent and present obligations that could be offset against each other. In this case, the spouse is, under the terms of the trustee's resolution, entitled to be paid the deceased member's benefits as a lump sum. The resolution therefore gives rise to a present liability to pay an amount owing to the spouse. However, the spouse has no present liability to pay an amount to the trustees. Accordingly, there is no mutuality of liabilities of the type in respect of which the principle in Spargo's case may apply that may be set-off against each other by agreement, so as to effect payment by that agreed set-off. Simply debiting the amount of the deceased member's benefits from the deceased member's account and crediting the account of the spouse with that amount by way of journal entry in the accounts of the SMSF does not constitute a 'payment', and therefore a 'cashing', of the deceased member's benefits as a lump sum to the spouse. For the deceased member's benefits in the SMSF to be considered 'cashed' as a lump sum to the spouse for the purposes of regulation 6.21 of the SISR, the benefits must actually be 'paid' by being 'cashed' to the spouse, as required by regulation 6.17 of the SISR.

Legislative references: Superannuation Industry (Supervision) Act 1993 subsection 10(1)
Case references: Re Harmony and Montague Tin & Copper Mining [1873] 8 Ch App LR 407
Related public rulings and determinations: Self Managed Superannuation Funds Determination SMSFD 2011/1
Other references: Australian Oxford Dictionary 2nd Edition 2004 Macquarie Dictionary 6th Edition 2013
Subject references: Death benefits - superannuation benefits Lump sum - superannuation benefits Lump sum superannuation payments Self-managed superannuation funds SIS payment standards Superannuation Superannuation benefits