In the event that a member of an SMSF dies, compulsory cashing of benefit requirements applies which means trustees have an obligation to pay out the member’s benefits as soon as possible. 

A deceased member’s benefits may be paid in the form of a lump sum, an income stream or a combination of both provided the payment is allowable under relevant superannuation law and the SMSF’s trust deed.

If the beneficiary is a dependant for tax purposes, the benefit received is entirely tax free. A dependant for tax purposes is defined in the Income Tax Assessment Act 1997 (ITAA 97) to include:

• Your spouse, including former spouse, de-facto of the same or opposite sex;
• Your children (including step children) aged under age 18 or age 18-25 and in full-time study;
• A person in an interdependency relationship with you; or
• A financial dependant.

If the beneficiary is a non-dependant for tax purposes (for example an adult child over age 18) no tax is payable on any tax-free component received but the taxable component of the super balance is taxed at 15% plus Medicare Levy and any untaxed element relating to say a life insurance benefit is taxed at 30% plus Medicare Levy. Accordingly, where there are no tax beneficiaries, strategies may be appropriate prior to the death of the member to try and convert more of the taxable component into a tax-free component.  Some of these strategies were discussed within the Superannuation module.