Amongst the changes confirmed in the recent Federal Budget, was the additional earnings tax for super funds with balances of over $3 million, come 30 June 2026. Interestingly, this change sparked further industry consideration to how this impacts the super death benefits of SMSF members.
In this article, we introduce the school of thought behind how when an SMSF member dies, their tax losses could potentially be lost, and ultimately impact their death benefit payment.
What are super death benefits?
Superannuation death benefits refer to the money or assets that are paid out when a superannuation fund member passes away. The benefits paid also include any insurance proceeds, as well as funds from the member balance. These benefits are typically paid to the deceased member’s dependents, nominated beneficiaries or legal personal representative.
Does a beneficiary pay tax on a super death benefit that they receive?
In Australia, the tax payable on a superannuation death benefit depends on various factors such as the recipient of the benefit, the age of the deceased, and whether the benefit is paid as a lump sum or an income stream. Here are some key points to consider:
Taxation of lump sum death benefits
Tax-Free Component: The tax-free component of a superannuation death benefit is not subject to tax, regardless of who receives it.
Taxable Component: If the recipient is the deceased’s spouse, including de facto spouse, the taxable component is generally tax-free.
If the recipient is a dependent child under 18 years old, the taxable component is generally tax-free up to a certain limit (known as the ‘tax-free threshold’). Amounts above the threshold may be taxed at penalty rates. If the recipient is a non-dependent, such as an adult child or another non-dependant beneficiary, the taxable component is subject to tax.
Lump sum tax rate: A flat rate of 15% plus Medicare Levy on the taxable component.
Marginal tax rate: The recipient’s marginal tax rate plus Medicare Levy on the taxable component.
What is the tax payable on a death benefit income stream?
If the recipient is a spouse, including a de facto spouse, the death benefit income stream is generally tax-free as those beneficiaries are considered to be a death benefit dependant. If the recipient is a non-dependent, the taxable component of the income stream is included in their assessable income and taxed at their marginal tax rate plus Medicare Levy.
Why could the confirmed change in the federal budget affect my super death benefit?
The confirmed changes to the additional earnings tax on super balances over $3 million means that a super fund member’s spouse or de facto (or other beneficiaries) may not receive the tax losses that would otherwise have been carried forward to them. The Australian treasury has yet to release legislation surrounding the changes, however, commentators in the superannuation industry welcome conversation with Treasury to ensure that nuanced elements of the changes don’t negatively impact the super fund member or their beneficiaries.
How can an SMSF member keep up to date with taxation laws?
Understanding the tax treatment of your SMSF, including how a lump sum death benefit or super income stream will affect the member’s beneficiaries upon their death or permanent disability, it’s prudent to seek professional assistance from a financial practitioner such as an accountant or financial planner. Importantly, it’s also imperative to understand how the investment decisions made could potentially impact the SMSF for tax purposes.
Accessing professional assistance with a self-managed super fund
There are many professionals involved in the successful establishment and management of a self-managed super fund. Particularly for SMSF trustees looking to invest in direct property through their fund, setting up a Limited Recourse Borrowing Arrangement (LRBA) will require professional assistance, as will sourcing an appropriate lending structure.
To understand more on how you can access an appropriate and considered loan for SMSF property investment, contact the team at SMSF Loan Experts.
