Masterclass – SMSF – Part 2: What are the tax consequences when there are no dependants when a member dies?

Masterclass – SMSF – Part 2: What are the tax consequences when there are no dependants when a member dies?

Part 2: What are the tax consequences when there are no dependants when a member dies?

In our post last month on this topic, we looked at WHO can get super money if there are no dependants when a member dies. This time we look at the tax consequences. Now even though there may be no dependants as defined by the SIS Act, (see 20 June) there is a range of people who can receive a payout from the estate as they may not need to qualify as what are called ‘death benefits dependants’ under section 302-195 of ITAA97.

The effect of this is that anyone who receives death benefits from the SMSF or via the estate who is classed under the Tax Act as a death benefits dependant, will receive the payout tax free.

A death benefits dependant for the Tax Act purposes includes:

• Your spouse or former spouse
• A child aged less than 18
• Any other person with whom you had an interdependency relationship with just prior to death or
• Any other person who was a dependant of you (i.e. relied on you for financial maintenance) just before you died.

However, any payouts to non-dependant nieces and nephews via the estate will be dependent on the tax components of the payout.

Non-dependants pay:

  1. 0% tax on the ‘tax free’ component of the superannuation lump sum payout and
  2. 15% tax on the taxable component of the payout. I
  3. 30% tax if the taxable component has an ‘untaxed element’ (usually this is where insurance proceeds form part of the death benefit) Note that the Medicare levy is applied if paid out directly from the SMSF, but not if paid via the estate.

As you can see, SMSF estate planning is a complex area and careful planning is required. It requires interpretation and analysis of multiple legal Acts (SIS Act, Tax Act etc), Trust Deed, personal wills, tax structures and your Binding Death Benefit Nominations.

What are your thoughts? Start or continue the conversation here!

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2 Responses to Masterclass – SMSF – Part 2: What are the tax consequences when there are no dependants when a member dies?

  1. Good article Paul. People should not be afraid set up separate pensions for funds they want to go to different beneficiaries. For example if some one had $100k in super from employer and salary sacrifice and then wanted to add another $100k from an inheritance. We would often recommend they start a pension with the current balance first so that when the new money is contributed it can be kept in a 100% tax free pension. You could target the risk pension to a tax-dependant and th second to any non-dependant. Both would get a tax free inheritance.

    Keep up the great blog effort.

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