SMSF Technical Education & Strategies

 

The tax consequences of SMSF death benefits.

Much of the strategy work in your SMSF estate planning will revolve around the tax consequences of where you want your SMSF death benefits to go. And this is where things can get slightly more complicated.

In our previous article, we established that only dependants as defined under the SIS Act could receive death benefits directly from the SMSF as either a lump sum or a pension (subject to child restrictions), or otherwise benefits could be paid directly to the estate.

 

Now when it comes to how much tax a beneficiary has to pay when they receive a SMSF death benefit, it will depend on whether or not they qualify as what are called “Death Benefits Dependants” – that is a ‘dependant’ as defined under the Tax Act - which is not exactly the same as a dependant as defined in the SIS Act.

 

The significance of this is that anyone who receives a lump sum death benefit 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” under the Tax Act includes:

 

- your spouse (includes de facto);

- a 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.

 

There is also a provision that says anyone who receives a super lump sum payout due to the death of a member who was killed in the line of duty (e.g. Defence Force, Police, Protective Services Officer) will also be classed as a death benefits dependant.

 

As you can see, the most common issue here is that an adult child of a member is NOT a death benefits beneficiary, and as such may be subject to paying tax (depending on the tax components of your SMSF account).

Note that "interdependency relationship" includes same sex couples, but might also include a situation of a mother and adult child living together where the adult child provides regular ongoing financial support to the parent on an ongoing and recurring basis, and where the parent relies on this ongoing support. In this case the mother may qualify as a tax dependant and receive favorable tax treatment on any super fund death benefit payout in the event of the death of the adult child - there have been situations where this has been the case.

 

The summary tables below show how each component of a SMSF death benefit is taxed, based on whether a death benefits dependant (as per the Tax Act) or a non death benefits dependant receives the benefit.

 

 

Taxation of Death Benefit Lump Sums

 

The rates in the table below relate to lump sums paid either directly by the SMSF to SIS dependants, or paid via the legal estate to anyone.

 

Tax components	Paid to a Death Benefits Dependant	Paid to a Non-Death Benefits Dependant
Tax free component	Nil	Nil
Taxable component	Nil	15% + medicare levy (no medicare levy if via estate)
Untaxed element of the taxable component	Nil	30% + medicare levy (no medicare levy if via estate). Note that a specific formulae applies.

Taxation of Death Benefit Pensions

 

Note that death benefits paid as income streams can only be paid to SIS dependants.

 

Tax components	Either the deceased or the dependant aged 60 or over	Both deceased and the dependant aged under 60
Tax free component	Nil	Nil
Taxable component	Nil	treated as normal assessable income and taxed at marginal tax rates, but with a 15% tax offset
Untaxed element of the taxable component	treated as normal assessable income and taxed at marginal tax rates, but with a 10% tax offset	treated as normal assessable income and taxed at marginal tax rates