Recipients of superannuation death benefits may be liable to pay tax once a member passes away. Let’s briefly discuss what SMSF taxes may be applicable upon an SMSF member’s death and their costs.
How much is the SMSF death tax?
How much is the SMSF death Tax?
For non-tax dependents who would get a super death benefit, the money leaving the fund is broadly made up of 2 components: tax-free and taxable components. Tax-free is generally the money in your fund that was put there by your after-tax non-concessional contributions. In this scenario, the recipients will not pay any income tax.
On the other hand, the taxable component is generally money in the fund that was put there by contributions such as employer contributions plus income. The recipient will generally pay no more than 15% tax plus levies on that component unless special circumstances apply to raise the rate to 30% plus levies. Nevertheless, if the recipient has low to nil taxable earnings in that financial year, their tax-free threshold may be used.
When a legal personal representative (LPR) of an estate receives a super lump sum, the tax law applies as if the recipients under the will received the death benefits directly. The LPR would pay the tax on behalf of the recipients.
An advantage of paying death benefits to the estate is that the Medicare levy does not apply, and the money can be dealt with in a more sophisticated way through the will. One downside is that the money sent out to the will may be subject to a family provision claim such as a challenge to the will.
Why some do not pay the super death tax
The super death tax only applies when a person passes away with money in superannuation. Those who have actually met a full condition of release and withdrew super before passing away but after reaching the age of 60, will have the ability to take those withdrawals into their hands tax-free. At this point, if desired, it is possible to then gift cash or possessions to people, or leave this in your will.
Are there any other effective super death taxes that exist?
There may be other applicable taxes on the death of a super fund member. Prior to mid-2017, those with a surviving spouse were used to the idea that their death benefits could be paid to the surviving spouse by way of pension. This typically allowed non-liquid assets such as property to stay in the super fund environment.
Since 1 July 2017 however, death benefit pensions count towards the surviving spouse’s $1.6 million transfer balance cap. This is a cap on just how much an individual can transfer into the retirement phase such as the full pension phase. This limitation might now require benefits to be given as a lump sum to the surviving partner since the law still needs super to be paid out as soon as possible after a member’s death.
When this happens, this triggers a capital gains tax event for the super fund. For property such as property in New South Wales, stamp duty may also apply on this transfer, which may come as an unpleasant shock.
Generally, the death of a super fund member may give rise to tax and duty. Therefore, proper wealth and estate planning are a must to minimise any applicable taxes upon death. Speak to a Chan & Naylor Wealth Planning Specialist today to formulate a reliable plan to take care of your family.