When a Self Managed Super Fund (SMSF) member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased. This should be done as soon as possible after the member's death.
If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream. The income stream can be new or a continuation of an existing income stream.
If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum.
A person is a dependant of a deceased member if, at the time of death, that person was:
- The deceased's spouse
- A child of the deceased – this includes a child less than 18 years old or a child that was financially dependent on the deceased and less than 25 years old or the child has a disability
- In an interdependency relationship with the deceased – this is 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
For income tax purposes, a person is death benefits dependant of a deceased member if, at the time of death, that person was:
- The deceased's spouse or former spouse
- The deceased person's child, aged less than 18
- Any other person whom the deceased had interdependency relationship
Also included in the definition of a death benefit dependant is someone receiving a super lump sum because the deceased died in the line of duty as a:
- Member of the defence force
- The Australian Federal Police
- The police force of a state or territory
- A protective service officer
- Or they are the deceased member's former spouse or de facto spouse
Who to pay the death benefit to
The member may have made a death benefit nomination asking the SMSF trustees to pay their death benefit to their nominated beneficiaries.
The nomination may be binding or non-binding. While having regard to the member's nomination, the SMSF trustees must ensure the nominated beneficiaries are entitled to receive death benefits under the trust deed and super law.
If the deceased member did not nominate a beneficiary, the trustee may pay it to the deceased's estate for the executor to distribute it according to the instructions in their will.
Calculating tax on super death benefits
If the death benefit is paid as a lump sum to a dependant of the deceased, it's tax free. It's not assessable income or exempt income. The SMSF doesn't withhold tax from the payment and the recipient doesn't include it in their income tax return.
If the death benefit is paid as an income stream, or is paid to a non-dependent or the trustee of a deceased estate, there may be tax to pay. Your SMSF will need to determine the taxed and untaxed elements of the benefit, calculate the applicable tax and, if appropriate, withhold tax from payments.
Tax saving amount
A tax saving amount is an additional lump sum payment that increases the deceased member's lump sum death benefit to negate the effect of tax while the member's benefit was accumulating in the fund. It can be made to a:
- Trustee of the deceased estate
- Spouse or former spouse of the deceased
- Child (including an adult child) of the deceased.
The SMSF can claim an income tax deduction for the payment.
Note: From 1 July 2017, funds may only include a tax saving amount as part of a death benefit if the member has died on or before 30 June 2017. The fund must make this payment by 30 June 2019. From 1 July 2019, no tax saving amount will be available for funds members, regardless of when the member has died.