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Has a self managed superannuation fund (SMSF) paid an eligible termination payment (ETP) on the death of a member to a taxpayer, where the SMSF has prepared journal entries in its books detailing an amount as being transferred from the account of the deceased member to the account of the taxpayer?

No. To be an ETP, the benefit must be paid to the taxpayer. Journal entries are insufficient to establish that a superannuation fund has paid an ETP.

The two members of a SMSF consisted of a married couple. On the death of one member, the trustee of the SMSF decided that the remaining member (referred to as the taxpayer) should be paid a death benefit. The benefits of the deceased member consisted of publicly listed shares and cash.

The taxpayer wishes to remain in the superannuation fund and to re-contribute the death benefit directly to their member account. In order to avoid transaction fees, the taxpayer 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.

Subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that an ETP includes any payment made to the taxpayer or in respect of the taxpayer. Paragraph (ba) of the definition of ETP states that an ETP in relation to a taxpayer means 'any payment made to the taxpayer from a superannuation fund by reason that another person was a member of the fund, where....'

To meet the definition of an ETP, the majority of the paragraphs of the definition require that a payment be made. It needs to be established whether the journal entries transferring the monies from the deceased member's account to the taxpayer's account represent a payment from a superannuation fund for purposes of section 27A(1) of the ITAA 1936. The term 'payment' is not defined in the ITAA 1936. Therefore it is necessary to consider the common law meaning of the term.

The majority of cases that consider whether a journal entry is a payment refer to the principle stated in Re Harmony and Montague Tin & Copper Mining (Spargo's case) (1873) LR 8 LR Ch App 407. In Spargo's case 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.

The cases that have applied the principle in Spargo's case have considered, among other things, whether there is a mutual liability or mutual obligation between the relevant parties.

In Case 18/97 97 ATC 227; AAT Case 11709 35 ATR 1074 (Case 18/97) it was held that where a superannuation fund has a present obligation to pay the member their accumulated credit either as a pension or lump sum, there is no present obligation on the part of the member and therefore there is no mutual obligation.

In the present case, the taxpayer is entitled to the deceased member's benefit. In order for the benefit to be characterised and taxed as a death benefit ETP the SMSF must make a payment.

Based on the principle in Spargo's case, 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 ( Case 18/97 ).

Therefore, a journal entry is not sufficient to establish that the SMSF has made a payment to the taxpayer under the provisions of subsection 27A(1) of the ITAA 1936. As the SMSF has not made a payment to or on behalf of the taxpayer, the transaction does not represent an ETP and therefore cannot be taxed as a death benefit ETP.

Note: To pay superannuation benefits to members by journal entries is also in conflict with subregulation 6.17(2) of the Superannuation Industry (Supervision) Regulations 1994 which requires that a member's benefits must be paid : • By being cashed in accordance with Division 6.3; or • By being rolled over or transferred in accordance with Division 6.4.

Journal entries are insufficient to satisfy the requirement that benefits must be cashed (see ATOID 2002/141).