When an SMSF member has died, the surviving SMSF trustees must comply with the applicable super and tax laws for paying out death benefits. A death benefit payment is generally made by the SMSF to another person after of the death of a member of the fund. For a dependant of the deceased, the death benefit can be paid as either a lump sum or income stream. Income streams (super pension) are usually either a new income stream that is paid to a dependant, or a reversionary income stream that is the continuation of an existing income stream and paid to a dependant. For those not a dependant of the deceased the death benefit must be paid as a lump sum. You can nominate the beneficiary for your super with your super fund (a death benefit nomination) instead of leaving the trustees to decide. If you have NOT nominated a beneficiary then the estate can access your super and distribute it (now as part of your estate), according to the instructions in your will. Note a will does not control your super directly – super is outside your estate, and is BEST controlled by death benefit nominations or agreements. A death benefit nomination is a statement by a member of a super fund to the trustees of the super fund directing them on how to deal with their super account when they die. A death benefit nomination is supplied to the trustee of the SMSF by the member requesting the fund pay their benefits to a nominated beneficiary/ies. It is either:
- Binding – it directs the trustees to pay the member’s death benefit to a legal personal representative or dependant;
- Non-binding – it notifies the trustees of the member’s preferred beneficiaries, leaving the trustees to make the final decision.
Super law does not require an SMSF member to have a death benefit nomination to pay out death benefits. But, if an SMSF does have one, it will need to first follow the rules of the SMSF’s trust deed (the deed must allow them) and the rules of super law. For more refer to – SMSFD 2008/3: Binding death nominations.
A dependant under superannuation laws is someone who had a dependent relationship with the deceased. This includes the spouse, any of the deceased’s children or anyone with whom the deceased had an interdependency relationship. Under income tax laws, a dependant for super death benefit purposes is:
- A surviving spouse or a de facto spouse;
- An ex-spouse;
- A child of the deceased who is under 18 years old;
- Any person who was financially dependent on the deceased person just before they died;
- Any person with whom the deceased has an interdependency relationship just before they died.
To be financially dependent on the person that died means they relied on them for necessary financial support. Children over 18 years old must be financially dependent on the deceased to be considered a dependant. An interdependency relationship is generally a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other. From 1 July 2007, for income tax purposes any person is included in the definition of a death benefit dependant if they receive a super lump sum because the deceased died in the line of duty as a member of the defence force, the Australian Federal Police or the police force of a state or territory, or as a protective service officer. Any person who does not fall into one of the categories listed above is a non-dependant for super death benefit purposes.
Calculating tax on super death benefits
There are usually 2 components of a super account:
- Taxable which may consist of an element taxed in the fund or an element untaxed; and
SMSF trustees must determine these elements (have accounts up to date and report these components, eg via Member Statement) before paying any super death benefits. If the total benefit is tax-free there is no requirement to report the amount. If part of the benefit payment is tax-free, the tax-free amount needs to be reported on the PAYG payment summary. Lump sum payment to a dependant of the deceased A super lump sum that is paid to a dependant of the deceased is not assessable income and is not exempt income where they are a death benefits dependant of the deceased for tax purposes. The SMSF does not withhold tax from that payment. Lump sum payment to a non-dependant of the deceased The taxable component of a super lump sum death benefit received by a non-dependant is assessable income. The element taxed in the SMSF will be taxed at the maximum rate of 15% (plus the Medicare levy). The element untaxed in the SMSF will be taxed at the maximum rate of 30% (plus the Medicare levy). Lump sum super death benefits paid to non-dependants of Australian Defence Force and police personnel who have died in the line of duty will receive the same concessional tax treatment as a lump sum super benefit paid to a dependant Lump sum payment to the trustee of a deceased estate There is no requirement for an SMSF to withhold any tax from a lump sum death benefit paid directly to the trustee of a deceased estate. However, your SMSF must provide a payment summary to the trustee within 14 days of making the lump sum payment. The amount of the tax-free component and taxable component of the payment are included on the payment summary at the relevant labels. Refer here for more – How tax applies to super and death benefits
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