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Superannuation and Death Benefits – Not Always Tax Free

Superannuation is progressively becoming a major asset for most Australians. For some, navigating a death benefit claim, and the tax implications that flow from receiving a death benefit is a little like Charlotte’s Web.

In our experience, many people do not realise they are paying for life insurance through their superannuation fund. After death, the remaining balance of your superannuation plus the life insurance is known as a ‘death benefit’, which can often be a substantial amount.

In the absence of a deceased member having a Binding Death Benefit Nomination it is left to the trustee of the superannuation fund to decide who will receive the deceased member’s death benefit. Increasingly, we receive a number of enquiries from people wishing to claim a deceased’s death benefit. However, what is not considered is the tax implications that may exist as a result of receiving the death benefit.

Whilst the trustee of a superannuation fund can decide to allocate a death benefit to a superannuation dependent, the funds will only be tax free if the superannuation dependent is also a tax dependent.

Superannuation dependants are different to tax dependants. It is important to know the difference as this will determine whether tax will be payable.

Who is a superannuation dependant?

Upon the death of a member, the trustee of the superannuation fund can decide to pay the death benefit to:

  • the deceased’s legal personal representative (i.e. the deceased’s estate); or
  • one or more of the deceased’s dependants.

The deceased’s dependents is defined in the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) as:

  • the deceased’s spouse at the date of death;
  • the deceased’s child (including step-child) of any age;
  • persons who were financially dependent on the deceased; and
  • persons who were in an interdependency relationship with the deceased.

Who is tax dependant?

Notwithstanding that the trustee of a superannuation fund can allocate a death benefit to the legal personal representative of the deceased’s estate, or any one or more of the above dependents, the funds will only be tax free if the dependent falls in the definition of ‘death benefits dependant’ as defined in section 302-195 of the Income Tax Assessment Act 1997 (Cth) (ITAA 97).

A death benefits dependant is:

  • the deceased’s spouse or former spouse;
  • the deceased’s child (including step-child) under age of 18 years;
  • persons who were financially dependent on the deceased; and
  • persons who were in an interdependency relationship with the deceased.

When is the payment of the death benefit tax free?

In order for the payment of the death benefit to be tax free, you must be a dependant that is captured by the ITAA 97.

Being a superannuation dependent alone is not sufficient for the death benefit to be paid to you tax free.

In some cases, tax can be up to 31.5% including the Medicare Levy on the taxable component of the death benefit. Because of this, it is always our advice that advice is sought from an accountant as to the amount of tax that will be payable before any of the funds are spent.

What if the death benefit is paid to the legal personal representative of the deceased’s estate?

Under the SIS Act, the death benefit can be paid to the deceased’s legal personal representative.

The trustee of a superannuation fund may elect, in its discretion, to pay the death benefit to the legal personal representative of the deceased’s estate. However, if the deceased did not have any dependants within the definition of the SIS Act, the trustee may have no choice but to pay the death benefit to the legal personal representative of the deceased’s estate.

In this case, the legal personal representative of the deceased’s estate must ensure they are seeking legal and financial advice as to their obligations in relation to the estate, and the taxation payable by the estate for receiving the death benefit.

Make sure you are seeking advice

Claiming a death benefit is not just as simple as lodging a claim and receiving the funds.

In our experience, many people are placed in a position where they have received a death benefit, and only after it is paid, they become aware of the tax implications.

It is important to seek advice before any claim is made for a death benefit to ensure you are adopting the best strategy to minimise tax.

Contact our team of wills and estates legal experts today to discuss your superannuation and death benefits or legal issues.

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Chloe Kopilovic

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Chloe Kopilovic

Call 07 3035 4077 to speak with our team now