Death of an SMSF member

What trustees need to do when an SMSF member dies, how super death benefits can be paid, and tax on death benefits.

What trustees need to do when a member dies

When a self-managed super fund (SMSF) member dies, trustees are responsible for correctly identifying who to pay the member’s superannuation to. This is called a super death benefit.

The SMSF generally pays the member’s remaining super to one of the following:

• a dependant
• a nominated beneficiary of the deceased (either binding or non-binding)
• the deceased’s legal personal representative to distribute it according to the instructions in their will.

Trustees must also:

• ensure required tax on super benefits is deducted from the benefit
• meet their PAYG obligations.

Death benefits should be paid as soon as possible after the member’s death.

Depending on the structure of the SMSF, trustees may also need to:

• sell assets to pay the super death benefit
• check their fund structure is still best for the new circumstances.

For example, if there were two trustees and now there is only one left, they could either:

• appoint another trustee
• set up the SMSF with a corporate trustee
• transfer their super to another fund and wind up the SMSF.

The fund has 6 months to restructure after the death of a member.

If there is a change in trustee structure, notify us of changes within 28 days.

Getting all of this right is important because death benefit payment disputes can lead to costly court action.

When a benefit is a member benefit

If a member requested an amount to be paid from their fund before they died, but died before they received it, it may be a member benefit in some limited cases. This is determined by the facts and circumstances surrounding the payment.

At the time of payment, the trustee must assess whether it is a member or death benefit based on the facts known at the time. These include the:

• terms of the request from the member
• terms of the trust deed and any other governing rules
• knowledge at the time the payment is made (including if the trustee is aware that the member has died)
• entity that the payment is being paid to
• circumstances and timing of the payment
• payment being made because of and in line with the request made by the member.

For advice on specific circumstances, the executor or legal personal representative of a member’s estate can apply for a private ruling.

Paying death benefits

A trustee of a regulated super fund can only pay super benefits according to the governing rules of the fund, including:

• the fund’s trust deed
• tax and super laws.

Your fund’s trust deed must be followed, even if it is different to a member’s will.

The governing rules of the fund:

• set out when benefits can be paid and who they can be paid to, including after a member’s death
• must be read carefully to determine a member’s benefit entitlements in the event of death.

Trustees need to:

• consider any binding or non-binding death benefit nominations where the member has asked the SMSF trustees to pay their death benefit to their nominated beneficiaries
• consider, if the deceased member did not nominate a beneficiary, whether the death benefit may be paid to the deceased’s estate for the executor or legal personal representative (executor of their estate) to distribute according to the instructions in the member’s will
• keep records of all decisions made
• ensure the nominated beneficiaries are entitled to receive the death benefits under the trust deed and super law.

Without a binding nomination, the remaining trustees will decide how the benefits are distributed by considering the fund’s trust deed and super laws.

How death benefits can be paid

If the recipient is a dependant of the deceased, the death benefit can be paid as a lump sum or income stream (pension). The income stream can be new or a continuation (reversionary) of an existing pension.

If the recipient is not a dependant of the deceased, the death benefit must be paid as a lump sum to the appropriate beneficiary or legal personal representative (executor of their estate). It can be in 2 amounts, an interim lump sum and then a final lump sum but no more than 2 amounts.

Who is a dependant

A person is a dependant of a deceased member if, at the time of death, that person was:

• the deceased’s spouse or former 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 a 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 with whom the deceased had an 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
• member of the Australian Federal Police
• member of the police force of a state or territory
• protective service officer
• they are the deceased member’s former spouse or de facto spouse.

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 (pension) or is paid to a non-dependant 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.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.