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.

Who to pay the death benefit to

• Nominated beneficiaries- Appointed by the deceased member.
• 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.

SMSF trustees responsibility- To ensure that nominated beneficiaries are entitled to receive death benefits as per the trust deed and super law.

How to pay the death benefits

• If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream.
• If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum.

Dependants

For INCOME TAX purpose following person will be considered as dependants:

• the deceased’s spouse or former spouse
• Child of deceased member aged less than 18
• 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.

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. 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.

Source: ATO