Even in death, taxes will follow, so you may be wonderng how is your Superannuation is taxed upon death? Generally speaking, how tax applies & what tax will arise to your superannuation benefits depends on your age, the source of your superannuation, and how benefits are paid to your beneficiaries.
Most members of SMSF just ignore the possible taxes that may be applicable on their super or put it into the too hard basket, as dealing with a death of a SMSF member can be confusing.
There are 2 main ways that your super gets taxed:
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- Tax on withdrawing your superannuation
- Tax on super benefits when you die
Let’s have a look at each a little more closer.
1. Tax on withdrawing your superannuation
The rate at which your super benefits are taxed will depend on several factors, including:
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- Your preservation age and the age you will be when you withdraw monies from your superannuation fund
- Whether the money in your superannuation account is from a taxable or tax-free source
- Whether you will get the payment as an income stream (and the type of income stream) or a lump sum payment
The above factors determine whether you:
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- Pay tax on the withdrawal (for example, whether it’s taxable income or tax free)
- Receive various tax offsets that reduce the amount of tax you pay
Generally, your superannuation benefits will include both a tax-free and a taxable component.
2. Tax on super death benefits
The tax on a superannuation death benefit depends on whether:
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- You were a dependant of the deceased at the time of death
- It’s paid as a lump sum or a superannuation income stream benefit
- The income stream is an account-based or a capped defined benefit income stream
- The superannuation is taxable or tax-free, and whether the super fund has already paid tax on the taxable component
- Your age and the age of the deceased person when they died
Note
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- If you are a dependant of the deceased, you do not need to pay tax on the taxable component of a death benefit if you receive it as a lump sum
- If you receive the benefit as an income stream, different rates of tax may apply depending on the factors mentioned above
- If you’re not a dependant of the deceased, you can only receive the benefit as a lump sum
The taxable component of the payment will be entitled to a tax offset that ensures the rate of income tax is as follows:
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- Taxed element – maximum of 15% plus Medicare levy
- Untaxed element – maximum of 30% plus Medicare levy
It’s important for every member of a SMSF to nominate beneficiaries. This should be done by having a Binding Death Benefit Nomination Form (BDBNF) completed. To find out more about the treatment of superannuation withdrawals upon death and to sort out your BDBNF, speak to us today.