This is a contribution by our resident financial advisor, Christina. Christina has one eye on the retirement prize but in the meantime she’s a taxation and financial advisor in Brisbane. Christina is here to answer your questions about financial planning, selling up your business and getting your dollar ducks in a row for retirement. We asked her how to avoid the death tax on superannuation and she’s got the goods! As always, below is general information and you must consult your financial advisor for advice related directly to your circumstances.
Death and Taxes
There are two inevitable things in life: death and taxes. How do you make sure the taxman doesn’t lay claim to your superannuation after you’re gone? Under superannuation law, a binding and non-binding death benefit nomination can be made to the Deceased’s legal representative (eg. Executor of the Will) or dependent. So, legally, how do you avoid the death tax on your superannuation?
Binding Death Benefit Nomination
A binding death benefit nomination (BDBN) is instruction from the Deceased to their superannuation fund detailing how the Deceased wishes for some or all of their superannuation death benefits to be distributed. Having a BDBN in place reduces the risk of claims by other beneficiaries and ensures the distribution of the superannuation death benefit is complementary to the Deceased’s will. A BDBN is valid for a maximum of 3 years and lapses if it is not renewed.
Get your Docs in a Row
If a superannuation member passes away and there is no BDBN, the superannuation fund trustee(s) will make a payment to the Deceased’s legal representative or use their discretion in deciding which dependent(s) the death benefit is paid to. A non-binding death benefit nomination means the distribution to the beneficiaries is at the discretion of the superannuation trustee and the non-binding death benefit nomination acts as a guide. There can be a lack of uncertainty with a non-binding death benefit nomination as the trustee must consider various issues including any other potential beneficiaries at the time of the members death.
How is a death benefit taxed?
There are number of important questions to ask when figuring out how Superannuation Death Benefit payments will be treated for income tax purposes.
- Is the Superannuation Death Benefit going to be paid to a dependent of the Deceased or someone who wasn’t dependent on the Deceased?
- Is the Superannuation Death Benefit going to be paid as a superannuation income stream or lump sum?
- What makes up the Superannuation balance? Is it a combination of taxable and tax-free components?
- What was the age of the Deceased?
- How old is the person receiving the Superannuation Death Benefit?
Once the above questions have been answered, the tax consequences of the Superannuation Death Benefit can be considered. It is important to keep in mind that dependents of the Deceased are eligible for tax concessions. The opposite applies for non-dependents of the Deceased i.e. they are not eligible for tax concessions.
Non-Dependents
There is a lot of grey area when considering if a person was a dependent or non-dependent of the Deceased. However, both the tax legislation and superannuation legislation both recognise an ‘interdependent relationship’. In determining an interdependent relationship, all of the answers to the below questions must be yes.
- Did the dependent have a close personal relationship with the Deceased?
- Did the dependent and Deceased live together?
- Did the dependent and Deceased support each other financially, either individually or mutually?
- Did the dependent and Deceased off each other domestic assistance and personal care, either individually or mutually?
Should an interdependent relationship exist, then the dependent (i.e. beneficiary) may receive a benefit as follows, in accordance with their circumstance:
| Payment Options | ||
| Circumstance | Lump Sum | Income Stream |
| Child under 18 | Yes | Yes |
| Child over 18 and financially independent | Yes | No |
| Child 18-25 and financially dependent | Yes | Yes |
| Disabled child – any age | Yes | Yes |
| Financial dependent at time of death | Yes | Yes |
| In an interdependent relationship Deceased | Yes | Yes |
| Spouse (inc. de factor/same sex. Excl. former spouse) | Yes | Yes |
Your Age
Further to this, the age of the beneficiary (dependent or non-dependent) and Deceased can impact the tax consequences as follows:
| Type of Death Benefit | Age of beneficiary | Age of deceased | Tax on Taxable Component | |
| Lump Sum | Taxed Element | Untaxed Element | ||
| Paid to dependent | Any age | Any age | Tax free | Tax free |
| Paid to non-dependent | Any age | Any age | Taxed at a max. rate of 15% (plus Medicare Levy) | Taxed at a max. rate of 30% (plus Medicare Levy) |
| Account-based income stream | Age of beneficiary | Age of deceased | Taxed Element | Untaxed Element |
| Paid to a dependent | Any age | 60 years or older | Tax free | Taxed at marginal rates with a tax offset of 10% |
| 60 years or older | Any age | Tax free | Taxed at marginal rates with a tax offset of 10% | |
| Under 60 years | Under 60 years | Taxed at marginal rates with a tax offset of 15% | Taxed at a marginal rate | |
| Capped defined benefit income stream | Age of beneficiary | Age of deceased | Taxed Element | Untaxed Element |
| Paid to a dependent | Any age | 60 years or older | 50% of income from taxed and tax-free amounts above the defined benefit income cap (if any) is taxed at marginal rates. The remainder is tax free. | Taxed at marginal rates with a tax offset of 10%* |
| 60 years or older | Any age | 50% of income from taxed and tax-free amounts above the defined benefit income cap (if any) is taxed at marginal rates. The remainder is tax free. | Taxed at marginal rates with a tax offset of 10%* | |
| Under 60 years | Under 60 years | Marginal rate with a 15% offset | Taxed at marginal rate | |
| *Max. tax offset is $11,875 for the 2023 – 2024 financial year. This has the effect that income from untaxed elements above the defined benefit income cap of $118.750 does not attract the offset. (Source: ATO website) | ||||
You will notice that non-dependents are only eligible to receive superannuation death benefits as a lump sum. Further to this, the already taxed element of the lump sum is exposed to a further 15% tax plus Medicare Levy in the hands of the non-dependent beneficiary.
What if your superfund pays the death benefit to your estate?
In this case the Executor of your Estate is responsible for applying the appropriate rate of tax prior to the funds being distributed to your beneficiaries. All benefits paid from your Estate will be taxed as lump sums. If the ultimate beneficiary isn’t classified as a dependent (under ATO definition), there are tax benefits in channelling the benefit through an estate.
Tax benefits of channeling through an estate
The 2% Medicare Levy does not apply to an Estate as it is not an individual. Also, as the benefit has already been taxed in the hands of your Estate, the beneficiary is not required to disclose the benefits received from your Estate in their income tax return.
This means other income tests that may apply to the individual won’t take into account the benefits received from your Estate. For example:
- Centrelink benefits based on assessable income
- Child support assessments
- Division 293 tax on superannuation contributions (i.e. Super tax)
Can my child receive a superannuation death benefit as an income stream?
Yes, they can as long as one of the criteria are met:
- They are under 18
- They have a permanent disability
- They are under 25 and where financially dependent on the Deceased.
If a child is not permanently disabled, the superannuation death benefit must be converted to a lump sum and paid to the child once they reach the age of 25. The lump sum is tax free.
When to speak to a financial advisor
It’s best to get financial advice when you’re setting up your will. Your lawyer will be able to offer general advice but speaking with a qualified accountant, taxation specialist or financial planner will save your kids a world of pain (and possibly a lot of money) down the line. The superannuation and tax legislation is a complex area of law. The above information is general in nature and is not financial advice. Please seek advice from your accountant and financial planner before applying any of the above to your personal circumstances.
