SMSF members can nominate who will get their benefits when they die.
A binding death benefit nomination directs the trustee to pay the benefit to a legal personal representative or a dependant. Without a binding nomination, the remaining trustees will decide how the benefits are distributed by considering the trust deed and super laws. The trust deed must be followed, even if it is different to the member’s will.
To understand how death benefits can be paid you need to know who is a dependant. A dependant is generally a spouse, or someone in a close personal interdependent relationship, or a child who is under 18, has a disability or is aged between 18 and 25 and is financially dependent on the deceased. In regard to tax, any sum paid to a dependant of the deceased is 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.
A dependant can be paid a lump sum or an income stream. A non-dependent can only be paid a lump sum. 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. Lump sums can be paid in cash or non-cash form, for example, shares or property.
The trustee may need to withhold tax from a death benefit. Working this out can be complex and will depend on a number of factors. If a trustee has to withhold tax, they must register for PAYG withholding and complete some other ATO forms.It’s wise to plan ahead. If there is a dispute over the payment of death benefits which can’t be resolved, it may lead to costly court action. Clear guidelines in the trust deed will help prevent problems.
It is a good idea to review your Death Benefit Nominations whenever there is a change in your life circumstances.
Make sure you do this for not only your SMSF, but also any retail or industry funds you may have.