Not surprisingly, most people don’t want to think about tax, superannuation or death but these three things play a significant part in every Australian’s life – especially because it concerns not just you, but your dependents.
What Happened To Your Super When You Die
In most cases, your super will be paid to your descendants when you pass. It can also be paid into your estate if you nominate that.
When you die, the amount in super that is paid to your dependents or estate is known as a ‘death benefit’. A death benefit is made up of your super account balance and any death benefits insurance you may have been covered for. This could potentially mean thousands of dollars, even if your super wasn’t that much.
Pro Tax Tip: Nominate your beneficiaries in your will so you know who your super benefits will be paid to.
Who Is Eligible To Receive A Death Benefit?
Many people think that your super will be paid to your estate through an executor or administrator who is referred to as the Legal Personal Representative (LPR) and distributed as part of your will. Potential beneficiary applications; those with a binding beneficiary nomination telling the super fund to pay their super to their LPR; or the super fund deciding to pay the LPR would be nominated but without a binding nomination, the super funds Trustee can decide who to pay the death benefit to. They don’t need to follow the deceased requests in their will.
If you want to ensure where your death benefit is to be paid, you need to nominate dependents. A dependent is considered to be a:
- spouse, including de facto and same sex partner
- child, including stepchild, your defacto’s child and an adopted child
- financial dependant – a person wholly or partially financially dependent on the deceased, and/or
- person the deceased person had an interdependent relationship with.
An interdependent relationship is one where two people (whether related or not):
- have a close personal relationship, and
- live together, and
- one or each of them provides the other with financial support, and
- one or each of them provides the other with domestic support and personal care.
An interdependent relationship also includes two people who have a close personal relationship with but who don’t satisfy the above criteria because one or both suffer from a mental, psychiatric or physical disability and/or are temporarily living part due to work. These relationships include siblings, close friends, adult children or parents in a caring situation. Normal parents or flatmates relationships don’t qualify.
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How To Apply For A Death Benefit
Your beneficiary or spouse will be sent an application for your benefit upon your fund’s notification of your passing. If your fund is aware of other beneficiaries and there isn’t a binding beneficiary nomination in place, they’ll be contacted so they can make a claim.
Your beneficiary or spouse will need to complete the form and send it back to the fund with certification documents that confirms their identity and your identity. The documents that will be asked for include:
- your birth and death certificates
- the applications driver’s license or passport
The beneficiary or your spouse will also need to confirm who can act on their behalf of your estate. An LPR will need to supply:
- your will
- probate
- if you didn’t leave a will, they’ll need letters of administration such as a court order confirming who is entitled for your assets
- Further proof may be required such as the completion of a dependency declaration
Pro Tax Tip: Your super fund has a legal obligation to find all of your potential dependents before they will pay your death benefit such as advertising in the paper or following up last known addresses.
Death Cover Insurance
If you took out death insurance, your fund will send copies of your birth and death certificate to the insurer as well as contact your last known employer to confirm that all contribution have been paid.
Who Will Receive Your Death Benefit?
Your super fund will consider all of the relevant information including who the benefits can legally be paid out to based on the Trust Deed and super laws, your financial circumstances and whether it was expected you would provide for them financially if you hadn’t died, any binding nominations and whether your will nominates how the death benefit should be paid.
Your binding nomination will ensure that your nominated beneficiary will receive your benefit. Your super fund will pay the amount into the bank account of your nomination as long as it’s valid and in force at the time of your death. This will be a once-off, lump sum payment but in some cases it will be paid as an income stream.
Pro Tax Tip: Children between 18 and 25 who are considered to be your financial dependents can choose to receive regular payments if they’ve been nominated as your beneficiary. Remaining balances will be paid to them in full when they turn 25.
Nominated children under 18 will be paid into a trust account and a Trustee will have responsibility for the money until they turn 18.
Pro Tax Tip: A binding agreement should be reviewed every 3 years because it has limited validity. A non-binding nomination will ensure that your super fund is paid to a beneficiary that isn’t legally binding. Your fund will take your wishes into account and remain legally responsible and consider relevant laws when making a decision who to pay your benefit to. You can change or nominate additional beneficiaries. It’s a good idea to review your beneficiaries after life events, such as a marriage, divorce, children or close deaths.
Tax Treatment
Taxation on super benefits can be complex and depends on a few factors, such as if your beneficiary was a dependent or not, if its paid as a lump sum or streamed, whether the super is tax-free or taxable and if tax already been paid and your age and the age of your beneficiary when you pass.
The death benefit, and how much of it will be taxed and paid out, depend on:
- The tax-free component
- The taxed element (the super provider has paid on tax)
- The non-taxed element (the super provider has not paid on tax)
Your beneficiary will need to include the information as assessable income where they’ll be taxed at their marginal rate if they are in receipt of a capped defined benefit income stream if it is a death benefit income stream where the deceased was aged 60 years or over at the time of their death and the beneficiary was older than 60 tears and the combined total of your tax-free component and taxed element is in excess of your defined benefits income.
A dependant won’t need to pay tax on the taxable component of a death payment if it’s received as a lump sum and wont’ have to include it on their tax return as income. A capped defined benefits income stream will have tax applied however.
If your beneficiary receives a capped defined benefits income stream and are:
Beneficiary is older than 60 years old and the deceased was any age
| Type of super | Effective tax rate (including the Medicare Levy) |
| Tax-free component and or Taxable component – taxed element is above the defined benefit income cap | 50% of the amount above the cap is assessed at your beneficiary’s marginal tax rates. This is known as assessable amount from your capped defined benefit income stream |
| Tax-free component and or Taxable component – taxed element is below the defined benefit income cap | No tax |
| Taxable component – untaxed element | Your beneficiary’s marginal tax rate less tax offset that they may be entitled to |
Beneficiary is under 60 years old and deceased was 60 years old or older at the time of death
| Type of super | Effective tax rate (including the Medicare Levy) |
| Tax-free component and or Taxable component – taxed element is above the defined benefit income cap | 50% of the amount above the cap is assessed at your beneficiary’s marginal tax rates. This is known as assessable amount from their capped defined benefit income stream |
| Tax-free component and or Taxable component – taxed element is below the defined benefit income cap | No tax |
| Taxable component – untaxed element | Your beneficiary’s marginal tax rate less tax offset that they may be entitled to |
Beneficiary is under 60 years old and deceased was under 60 years old at the time of death
| Type of super | Effective tax rate (including the Medicare Levy) |
| Taxable component – taxed element | Your beneficiary’s marginal tax rate less 15% tax offset |
| Taxable component – untaxed element | Your beneficiary’s marginal tax rate |
If you are a dependant and you receive a death benefit that is an account-based income stream
| Age of beneficiary and deceased (at the time of death) | Type of super | Effective tax rate (including Medicare levy) |
| Beneficiary is more than 60 years old or the deceased was 60 years old or older | Tax-free component | Tax-free (non-assessable, non-exempt income) |
| Beneficiary is 60 years old or older or the deceased was 60 years old or older | Taxable component – taxed element | Tax-free (non-assessable, non-exempt income) |
| Beneficiary is more than 60 years old or the deceased was 60 years old or older | Taxable component – untaxed element | Your marginal tax rate less 10% tax offset |
| Both beneficiary and deceased are under 60 years old | Tax-free component | Tax-free (non-assessable, non-exempt income) |
| Both beneficiary and deceased are under 60 years old | Taxable component – taxed element | Your marginal tax rate less 15% tax offset |
| Both beneficiary and deceased are under 60 years old | Taxable component – untaxed element | Your marginal tax rate |
Taxable component received as a lump sum
| Type of super | Effective tax rate (including Medicare levy) |
| Taxable component – taxed element | Your beneficiary’s marginal tax rate or 17%, whichever is lower |
| Taxable component – untaxed element | Your marginal beneficiary’s tax rate or 32%, whichever is lower |
If your beneficiary is not a dependent and they receive a death benefit as a lump sum, the taxable component will be taxed at their marginal tax rate.
Pro Tax Tip: Tax may be reduced by tax offsets.
The tax treatment of super streams can be highly complex for your chosen beneficiary or spouse. You can help by nominating who your death benefits should go to help them after you’ve gone. A tax agent will help your beneficiary understand how to receive your benefit under the most favourable tax options available to them. Seeking professional advice from a financial advisor and tax agent is recommended.