For taxation purposes there are four main types of financial dependents:
- A spouse or former spouse.
- A child, under 18 years of age.
- A financial dependent. This may include children under 25 who are full time students or a child (adult or otherwise) whose parent meets their mortgage repayments or similar, showing they are financially dependent.
- A person who has an “interdependent relationship” with the member. This is a relationship which involves mutual support and can include living with a dependent brother or sister or a disabled child.
More on Tax and SMSF Estate Planning
The SMSF benefits of a deceased member may consist of tax free, taxable and untaxed components:
- Lump sums – A lump sum paid to a dependent of the deceased member is tax free. The taxable component of a lump sum paid to a non-dependent is taxed at a rate of 16.5%. The tax free component of any lump sum is tax free to both dependent and non-dependent beneficiaries.
- Pensions – If the deceased member was over age 60, the pension will be tax free,irrespective of the age of the dependent. If the member and the dependent in receipt of the pension were under 60 at the time of the member’s death, the tax free component of any pension payment is tax free. The taxable component is assessable income with a 15% tax offset.
Note: Untaxed components are taxed differently and generally arise where an SMSF has life insurance for a member. The untaxed component of a lump sum is taxed at 31.5%. If received as part of a pension, it is assessable income but where the deceased member was in receipt of a pension and over age 60 there is a 10% tax offset.