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Death of a Member in an SMSF

The death of a member in a Self-Managed Super Fund (SMSF) is a significant event that requires careful administration and compliance.

 

It’s essential for trustees to follow superannuation laws and the fund’s trust deed to ensure the deceased member’s benefits are distributed legally and tax-effectively.

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At HelloLedger, we assist SMSF trustees with managing death benefits, ensuring ATO compliance, and simplifying the distribution process during this challenging time.

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What Happens When an SMSF Member Dies?

Upon the death of a member, the trustee must:

  1. Identify beneficiaries—the deceased’s dependents or legal personal representative (estate).

  2. Review the member’s binding death benefit nominations (BDBNs) or reversionary pension instructions.

  3. Determine whether benefits are paid as a lump sum, a pension, or a combination of both.

  4. Ensure the payment complies with the SMSF trust deed and superannuation laws.

Options for Paying Death Benefits

1. Lump Sum Payment
 

  • Death benefits can be paid as a tax-free lump sum to dependents.

  • Payments to non-dependents (e.g., adult children) may be taxable depending on the taxable and tax-free components of the benefit.
     

2. Reversionary Pension
 

  • If the member had a reversionary pension, payments automatically continue to the nominated beneficiary (e.g., spouse).

  • Income payments may remain tax-free for dependents, subject to the transfer balance cap rules.
     

3. Non-Reversionary Pension
 

  • Trustees may have the option to convert the balance into a lump sum payment or commence a new pension for eligible beneficiaries.

Who Can Receive Death Benefits?

SMSF death benefits can be paid to:
 

  1. Dependents:

    • Spouse (including de facto).

    • Children under 18 or under 25 if financially dependent.

    • Individuals in an interdependency relationship with the deceased.
       

  2. Legal Personal Representative (LPR):

    • Benefits can be paid to the estate for distribution according to the will.
       

  3. Non-Dependents:

    • Payments to non-dependents (e.g., adult children not financially dependent) can only be made as a lump sum and may be taxable.

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Key Compliance Requirements

  1. 1. Binding Death Benefit Nominations (BDBNs):
    - Trustees must check if a valid BDBN exists and follow the specified nominations.

    - BDBNs typically expire after three years unless specified as non-lapsing in the trust deed.
     

  2. Reversionary Pension Documentation:
    - Ensure reversionary pension instructions are clearly documented in the fund’s trust deed.
     

  3. Reporting to the ATO:
    - Report death benefit payments to the ATO, including any tax components.
    - Adjust the transfer balance cap for surviving beneficiaries.
     

  4. Timing of Payments:
    - Trustees must make death benefit payments as soon as practicable.

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At HelloLedger, we simplify the compliance process, ensuring death benefits are distributed quickly and correctly.

Tax Treatment of Death Benefits

​Recipient                            Tax Treatment

Dependents                       Lump sums and pensions
(Spouse, Child Under 18)   are tax-free.

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Non-Dependents              Lump sums may be taxed                                                   up to 17% on taxable                                                              components.

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Legal Personal                   Tax depends on whether

Representative (Estate)     the recipient of the Estate

                                             is a dependent or non-                                                        dependent.

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Death of a Member FAQs

  • What happens to an SMSF when a member dies?

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  • The trustee must determine the nominated beneficiaries, review the trust deed, and distribute death benefits as a lump sum or pension in compliance with superannuation laws.

  • What is a binding death benefit nomination (BDBN)?

     

  • A BDBN directs the trustee to pay benefits to nominated beneficiaries and overrides trustee discretion. It must comply with the SMSF trust deed and be renewed every 3 years unless specified as non-lapsing.

What is a reversionary pension?

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A reversionary pension allows the pension to automatically transfer to a nominated beneficiary, such as a spouse, without requiring a new pension setup.

Can HelloLedger assist with SMSF death benefit payments?

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Yes, HelloLedger helps trustees:

  • Review trust deeds and nominations.

  • Manage tax calculations for beneficiaries.

  • Complete ATO reporting and ensure compliance.

  • Can death benefits be paid to non-dependents?

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  • Yes, but only as a lump sum, which may be taxable on the taxable component of the benefit.

Is tax payable on death benefits?

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  • Dependents: Benefits are generally tax-free.

  • Non-Dependents: Lump sum payments may be taxed at up to 17% on the taxable component.

  • How quickly must death benefits be paid?

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  • Payments should be made as soon as practicable after the member’s death. Delays can lead to compliance issues and penalties.

Get in Touch

Ready to take control of your retirement savings with a Self Managed Super Fund? 

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Contact HelloLedger today for expert SMSF services. Together, we’ll pave the way for a secure and prosperous retirement. Say Hello to strategic superannuation management and Goodbye to worry!

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