I recently considered a case where the SMSF trustees wished to pay a superannuation death benefit to the former spouse of the deceased. This created an issue as the definition of a dependant is slightly different for:
- who the SMSF can pay a death benefit to (superannuation law) and
- how the death benefit will be taxed (taxation law).
Under superannuation law, a death benefit dependant includes:
- the deceased’s spouse or de facto spouse
- a child of the deceased (any age)
- a person financially dependant on the deceased
- a person in an interdependency relationship with the deceased
- this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.
Any of these parties can be paid a death benefit directly from the fund.
Under taxation law, a death benefit dependant includes:
- the deceased’s spouse or de facto spouse
- the deceased’s former spouse or de facto spouse
- a child of the deceased under 18 years old
- a person financially dependent on the deceased
- a person in an interdependency relationship with the deceased.
So the benefit to a child over the age of 18, in the absence of their qualifying under any other section, would be reduced by tax on the taxable component. Whilst a former spouse could receive the death benefit tax free, they would need to be paid from the estate, not the SMSF.
