When an SMSF member dies, their members balance must be “cashed out” under law as a lump sum payment. A dependant of the recently deceased member can elect to receive the death benefit as a pension. Only dependants can make this election.
A dependant includes; a spouse, a defacto spouse, a child under 18, a financially dependent adult child under 25 old or a permanently disabled child.
If a pension is being paid to a child under 25, they must receive a lump sum payment before they reach 25 to complete the payment of cash benefits.
| Status of Beneficiary | Tax-Free Component | Taxable Component |
|---|---|---|
| Dependant | Tax Free | Tax Free |
| Non-Dependant | Tax Free | Taxed @ Marginal Tax Rate (Tax rebate = 15% X taxable component) |
If a death benefit payment is made to a non-dependant, tax will be payable on the amount that is taxable. The taxable component of the death benefit will be added to the recipient’s personal income for that year and that person will be given a tax credit of 15% on tax already paid by the Superannuation fund.
For example Bill died with $100,000 in his SMSF members account and decided before his death to pay his daughter his member’s entitlement upon death. The taxable amount of his death benefit was $50,000. When his daughter Sally completed her taxation return in the year she received her Dad’s death benefit she must declare the $50,000 taxable component and add it to her taxable income. Sally will receive a tax credit of $7,500 ($50,000 * .15%) on tax already paid by her Fathers SMSF.