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.
Duration 3:01. A transcript of What happens when a member dies is also available.
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Death benefit or 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.
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
- relevant legislation.
The governing rules set out when benefits can be paid and who they can be paid to, including after a member’s death. The governing rules of the fund must be read carefully to determine a member’s benefit entitlements in the event of death.
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, including:
- 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 whether they are aware that the member has died)
- the entity that the payment is being paid to
- circumstances and timing of the payment
- whether the payment is made because of and in line with the request made by the member.
For advice on specific circumstances, the executor or legal representative of a member's estate can apply for a private ruling.
Example: SMSF paying a death benefit
Jack and Jill are spouses, and members and trustees of the Hill SMSF. Jack has a terminal medical condition. He makes a request to his SMSF for release of his super.
Before the benefit payment is made, Jack passes away. It is then paid to an account belonging to his legal personal representative, forming part of Jack’s deceased estate.
At the time of payment Jill, as the surviving trustee, considered the above factors and determined that the payment is a death benefit. Notably:
- the terms of the trust deed of the Hill SMSF allow for release where a member meets a condition of release, including both the terminal medical and death conditions
- the trustee of the SMSF knew Jack had passed away before authorising the payment
- Jack’s super benefits are being paid to his legal personal representative’s account
- the payment is being made as soon as reasonably practicable to satisfy the compulsory cashing requirement that applies when a member dies, rather than in accordance with Jack’s prior request.
Example: APRA-regulated fund paying a member benefit
Satine is a member of an Australian Prudential Regulation Authority (APRA) regulated super fund. She has a terminal medical condition. Satine makes a request to her fund for release of her super benefits.
Before the benefit payment is made, Satine passes away. The trustee does not become aware of this until after the benefit is paid to the account in Satine’s request.
The terms of the trust deed allow for release where a member meets a condition of release under Schedule 1 of the Superannuation Industry (Supervision) Regulations 1994 (SISR) with a nil cashing restriction.
At the time of payment, the trustee considers the above factors and determines that the payment is a member benefit. Notably, the trustee:
- is not aware that Satine has passed away
- makes the payment to Satine’s personal bank account and expects she is alive to personally receive it
- makes the payment in line with Satine’s request to release money and not any other requirement.
Dependants
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.
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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.
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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.
When an SMSF member dies, the SMSF generally pays a death benefit to a dependant or other beneficiary of the deceased. Your member’s benefits need to be paid out as soon as possible after the member’s death.