Paying Death Benefits, Dependancy and Taxation
There are effectively four ways of looking after your dependants or others from a SMSF on your death:
The trustee may pay a lump sum, by way of cash or assets, from your benefits in the fund to a dependant or the trustee of your legal estate.
The trustee may pay a pension from the fund from your superannuation benefits to a dependant. There are restrictions on paying pensions to child dependants over age 18 unless they are a student under age 25 or a child who is disabled.
- A reversion of an existing pension which results in the continuation of the pension in the name of the reversionary beneficiary provided they are dependants – again subject to the child limitation above.
- Any insurance proceeds from a life insurance policy held by the trustee in your name may be used to increase the deceased member’s benefits.
Who is a Dependant for SMSF Purposes?
For taxation purposes there are four categories of dependant:
A spouse or former spouse.
A child of the person who is under 18 years of age.
A person who is a financial dependant. This may include a parent who meets, in whole or part a child’s financial commitments.
A person who is an “interdependent relationship” with the member. This is a relationship where there is mutual support including a brother and sister living together or a disabled child.
The Taxation of Super Death Benefits
The superannuation benefits of a deceased member may consist of tax free, taxable and untaxed components:
1. Lump sums – If a lump sum is paid to a dependant of the deceased member it is tax free. If paid to a non-dependant the taxable component is taxed at a rate of 16.5%. The tax free component of any lump sum is tax free to both dependant and non-dependant beneficiaries.
2. Pensions – For the tax free and taxable components of a pension, if the deceased member was over age 60, then irrespective of the age of the dependant, the pension will be tax free. If the deceased member and the dependant in receipt of the pension were under age 60 at the time of death, the tax free component of any pension payment is tax free. The taxable component is assessable income with a 15% tax offset. However pensions can only be paid to dependants and for child dependants those that are disabled or are under 25 years of age.
Note: Untaxed components are taxed differently and generally arise where a SMSF has life insurance for a member. The untaxed component of a lump sum is taxed at 31.5%. If received as part of a pension, it is assessable income but where the deceased member was in receipt of a pension and over age 60 there is a 10% tax offset.