SMSF STRATEGY GUIDE
TAXATION OF SMSF ESTATE BENEFITS
In the previous articles, we’ve covered SMSF estate planning generally, aslong with who is eligible to receive death benefits.
What we need to cover now is how these benefits are taxed. This is where the concept of a “death benefits dependent” comes in.
DEATH BENEFITS DEPENDANT
A death benefits dependent is one that can be paid a lump sum death benefit and receive it tax free.
a spouse (which includes de facto spouses)
a former spouse
a child under the age of 18
a financial dependent
or someone who was in an interdependency relationship with the deceased.
So lets have a look at how it works.
In this table we are looking at the taxation of lump sum death benefits.
You can see that regardless of the tax components, if it is paid out to a death benefits dependent - that is, anyone listed above – there is no tax to be paid.
But what if a benefit is paid to someone who is a super fund dependent, but not a death benefits dependent for tax purposes – with the most common example being an adult child. In this case as you can see in the column on the right, there is tax to pay depending on the tax components of the death benefit.
The tax free component is still paid out tax free.
The taxable components however do have a tax component, which can be substantial depending on the overall balance.
Remember the “re-contribution strategy” example we wrote about in Retirement Strategies. This strategy was all about converting the taxable component into tax free component, so that in the event of a member’s death, adult children of the member would substantially reduce or eliminate the tax liability.
WHAT ABOUT PENSION DEATH BENEFITS
So what about pension death benefits. How are they taxed ?
A key factor is the age of both the deceased member, and the dependent.
As can be seen in the table, if either the deceased or the dependent is aged 60 or over, then both the tax free and taxable components of the pension are tax free. The far less common component of an untaxed element does have some tax.
However if both the deceased and the dependent are aged under 60, then the tax free component stays as tax free, however income attributable to the taxable component is treated as normal assessable income and taxed at marginal tax rates, but with a 15% tax offset so it is still tax advantaged.
Again, the less common untaxed element of the taxable component is just treated as normal income and taxed at marginal rates.