Administration obligations when super death benefits are paid to the estate

13 Jan 2020

Lyn Formica

Head of SMSF Technical & Education Services

Q: My client died and her superannuation benefits were paid from her SMSF to her estate. From the estate, the proceeds will be distributed to her children who are not dependents for tax purposes. Who is liable to deduct Pay As You Go Withholding (PAYG) and lodge a Payment Summary – the SMSF or the estate?

A: The trustee of the SMSF will need to register for PAYG withholding and issue a PAYG Payment Summary to the estate (unless the entire benefit paid consists of tax free component). No tax should be withheld by the fund, regardless of the tax components. Instead, it is the executor of estate who will be responsible for paying the relevant tax liability.

Using the information shown on the Payment Summary, the lump sum death benefit will need to be included in the estate’s assessable income in the year of receipt and taxed as income to which no beneficiary is presently entitled. Where the persons who are expected to benefit from the estate are non-dependants for tax purposes, the components of the lump sum will be taxed as follows:

  • any tax free component will be non-assessable non-exempt income (ie tax free), and
  • any taxable component will be included in assessable income and taxed at marginal rates of tax (whether the estate is entitled to the tax free threshold will depend on the time elapsed since death), however, a tax offset will apply to reduce the maximum tax rate to:
  • 15% on the taxed element, and
  • 30% on the untaxed element.

The estate is not subject to Medicare levy.

This tax will be payable as part of the normal trust tax return lodgement/payment process and not as part of the PAYG withholding system. However, the executor should ensure they make allowance for this tax when making distributions to beneficiaries.

If the persons expected to benefit from the estate had been dependants for tax purposes, the entire lump sum death benefit would have been non-assessable non-exempt income (ie tax free).

The executor should not issue a Payment Summary when amounts are distributed to the beneficiaries. These amounts are effectively capital payments which will have no impact on the beneficiaries’ personal tax position.