SMSF practitioners should be aware while most lump sum superannuation death benefits paid to a beneficiary will have a taxed component, some of them can be untaxed meaning the recipient may face a liability of more than 30 per cent, according to a senior executive in the sector.
Smarter SMSF education and technical manager Tim Miller noted the tax treatment of a death benefit payment was not dependent on the superannuation laws, but rather on the Income Tax Assessment Act 1997, which states where the proceeds of an insurance policy form part of the payment, it was likely to be treated as untaxed when received by a non-dependent for tax purposes.
“The Superannuation Industry (Supervision) Act will determine who we can pay benefits to and the tax act will then determine who is a tax dependent for death benefit purposes,” he told attendees of a recent SuperGuardian technical webinar.
“This is where you go through your standard process – your spouse, your child under the age of 18, your child who is under 25 and financially dependent, your child who is suffering from a disability – they are tax dependents, as well as an interdependency relationship and a financially dependent person.
“If they are a tax dependent, then the entire lump sum benefit is going to be tax-free to them.
“If they are a non-tax dependent, then they are going to pay 17 per cent tax if the benefit is paid directly to them and 15 per cent if it’s paid by the estate, and 30 per cent plus Medicare, so 32 per cent on any untaxed element.”
He acknowledged an untaxed benefit was not common in an SMSF environment, but a number of key factors occurring at the same time could lead to that situation.
“An untaxed element will occur if the proceeds being paid out to the beneficiary incorporate insurance proceeds and the super fund has claimed a tax deduction on the premiums linked to those insurance proceeds, and the deceased was under the age of 65,” he explained.
“So, there are three things here. One, there has to be a death benefit, two, the deceased had to be under 65, and three, the fund had to claim a deduction on the premiums or on the future liability to pay a benefit. If you meet all those conditions, then there’s going to be an untaxed element.
“It’s a very rare set of circumstances when an untaxed element is calculated on a death benefit paid from a SMSF, so when it is, you need to understand that and be prepared to take on the appropriate tax calculations.”
