Author: Emma Partenza, Manager, TAG Financial Services
Superannuation death benefits can only be paid from a SMSF to superannuation dependants which include:
- the deceased’s spouse or de facto spouse,
- their child (any age),
- a person in an interdependency relationship with the deceased, and
- their legal personal representative (executor of their estate).
In the event a member wishes for their superannuation benefits to be paid to someone other than their superannuation dependants (for example, grand children or a charitable organisation), their benefits must first be paid to their Estate. Once there, their Will then directs the distribution to the nominated beneficiaries of the Estate.
A binding death benefit nomination in place directing benefits to a non-superannuation dependent would be invalid.
It is the income tax act that determines how superannuation dependants are taxed (if at all) on receiving a death benefit. Superannuation dependents who receive death benefits tax free include:
- the deceased’s spouse (or former spouse),
- their children under age 18 only (or up to age 25 where they are financially dependant on the deceased) and
- a person in an interdependency relationship with the deceased just before their death.
Consider this scenario
Mrs. Smith passed away, leaving no binding death benefit nomination, giving rise to trustee discretion in the payment of the death benefit. The trustees and executors of Mrs. Smith had resolved to sell a property in the SMSF to be able to pay a death benefit lump sum to Mr. Smith (under legal incapacity) as soon as practicable. However, before the death benefit could be paid, Mr. Smith passed away (1 year after his spouse Mrs. Smith).
As the death benefit was not paid prior to Mr Smith’s passing, was he entitled to receive the death benefit tax free?
Death benefits tax is assessed at the time the death benefit payment is made; however, additionally a deceased’s estate does not classify as a superannuation dependant.
It comes down to whether the decision on payment of the death benefit had been resolved and was properly documented by the trustees prior to Mr. Smith passing away. A death benefit could not form part of his estate until such a decision had been made by the trustees.
Where the decision had been made to pay Mr. Smith a death benefit of the late Mrs. Smith before he passed away, but he dies before receipt – it would form part of his estate – he was entitled to it. The fact he passed away prior to receiving it, does not change the nature of the death benefit paid to him.
However, where a decision on payment of death benefits had not been made and properly documented prior to his death, his estate is unable to receive death benefits tax free.
Such a scenario places a significant importance on having valid binding death benefit nominations in place to avoid trustee discretion in the payment of death benefits as the timing of the death benefit decision proves critical in payment and taxation of death benefits, especially where the deceased spouse is unwell or legally incapacitated.
If you have any questions about these changes please contact us on 03 9886 0800 or via email.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2021. Please do not reproduce without the expressed written consent of the author.