The functionality is different with Kitkat as you can choose your default SMS application in the Wireless & Network settings. Below is for 4.4 and for 4.3 and below. Open the google-plus-hangouts application.
For Android 4.4+ (Kitkat) (As per the above):
Click on Menu then Settings.
Click on SMS.
Click on the setting "SMS Enabled" under the General heading and change your default SMS application.
For 4.3 (Jelly Bean) and Below:
Click on Menu then Settings.
Click on SMS.
Untick the setting "Turn On SMS"
http://asset1.cbsistatic.com/cnwk.1d/i/tim2/2013/11/08/Hangouts_disable_SMS.png