When an SMSF member dies
There are many matters that need to be addressed including:
1. What happens to the member’s benefit;
2. Tax consequences; and
3. The effect on the trusteeship of the SMSF.
What happens to the member’s benefit?
Death is a cashing event and accordingly, the deceased member’s benefit needs to be paid (SISR Regulation 6.21(1)). This should be done as soon as possible after death. The ATO, by way of informal guidance, considers 6 months to be practicable unless there are extenuating circumstances.
The first thing to do is check whether the deceased made a valid binding death benefit nomination. If so, the benefit is to be paid in accordance with that nomination.
If there is no binding death benefit nomination, the trustee has a limited discretion to whom it can pay the benefit. It can be paid to:
1. The estate of the deceased member;
2. To the deceased spouse;
3. To a child under 18 or to a child under 25 who was financially dependent on the deceased;
4. To a person in an interdependency relationship with the deceased.
The benefit must be paid as either:
1. a single lump sum;
2. an interim lump sum and a final sump sum;
3. one or more pensions or annuities.
(SISR Regulation 6.21)
Further restrictions apply when the benefit is paid as a pension (SISR Regulation 6.21(2A) and (2B)).
What are the tax consequences after death?
The tax consequences depend on whether the benefit is paid to a death benefit dependant as defined in section 302-195 of the Income Tax Assessment Act 1997.
A death benefit dependant is:
1. a spouse or former souse of the deceased;
2. a child of the deceased under the age of 18;
3. any other person with whom the deceased person had an interdependency relationship under section 302-200 of the ITAA 1997 just before he or she died.
Lump sum
A death benefit paid as a lump sum to a death benefit dependant is tax free. It is not assessable income or exempt income. (Section 302-60).
Where a fund pays a lump sum to the deceased estate of the deceased, there is a requirement for the fund to register for PAYGW but the amount to withhold is nil. When the lump sum is within the estate, and it is paid to a non-dependant, the executor needs to keep aside enough to pay the tax.
If a death benefit is paid as a lump sum to a person who is not a death benefit dependant, the tax is:
1. the tax-free component of the lump sum is non-assessable non-exempt income (section 302-140);
2. the taxable component is assessable income, and there are tax offsets to ensure the tax rate on the element taxed in the fund is 15% and the tax rate on the element untaxed in the fund is 30%.
Pension or annuity
If the death benefit is paid as a pension or annuity, tax consequences depend on whether it is paid it is paid to a death benefit dependant, the age of the deceased and the age of the recipient. There will be a requirement for the fund to register for PAYGW and remit to the ATO where the deceased member or the recipient was at least 60 years old.
Refer to subdivision 302-B of the Income Tax Assessment Act 1997 for a more precise breakdown.
What happens to the trustee?
When the member dies, section 17A of the SISA allows the executor to be appointed as trustee or as director of a corporate trustee. The executor can be a trustee up until the time when death benefits commence to be payable in respect of the member of the fund.
The appointment of the executor to the role of trustee is not automatic and must be done in accordance with the requirements of the fund deed and constitution for any corporate trustee.