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Tax on Superannuation Death Benefits

Benjamin Franklin said in 1789 that, “in this world nothing can be said to be certain, except death and taxes”.

Turns out, some 200 years later, this quote still rings true.

Even though death tax was abolished in Australia in 1979, a form of death duty still exists – tax payable on a death benefit that is paid to a person who is not considered a tax dependent as set out in the Income Tax Assessment Act 1997 (Cth) (ITAA).

Ensuring you have a considered estate plan, taking into consideration your superannuation and whether this tax can be minimised, is critical.

Starting position: Is there a Binding Death Benefit Nomination?

If a deceased person has superannuation, the first matter to consider is whether the deceased had a Binding Death Benefit Nomination in relation to their superannuation.

A Binding Death Benefit Nomination is a document that a member of a superannuation fund can complete nominating a beneficiary to receive their superannuation death benefit.

If a Binding Death Benefit Nomination exists, the trustee of the superannuation fund is bound to honour the nomination and pay the funds to the nominated beneficiary.

However, it is critical that when a member prepares a Binding Death Benefit Nomination, they are aware of who they are able to nominate.

If the document nominates someone other than a ‘dependent’ of the deceased or the legal representative of the deceased person’s estate, the document is likely to be invalid.

Who can you nominate in a Binding Death Benefit Nomination?

I often see people overlook the fact that you can only nominate certain people to receive your superannuation death benefit.

In a Binding Death Benefit Nomination, you may only nominate a ‘dependent’ or the legal representative of your estate (i.e. your executor or administrator).

However, there are two definitions of ‘dependent’, and it is important to understand which category of dependent you are nominating as this is where the death benefit tax may arise.

The two definitions of dependents are:

  1. ‘superannuation dependents’ as defined in the Superannuation Industry (Supervision) Act 1993 (Cth); and
  2. ‘tax dependents’ as defined in the ITAA.
Superannuation DependentsTax Dependents
The deceased’s current spouse or de facto spouseThe deceased’s spouse, former spouse or de facto spouse
A child (any age)Child under the age of 18 years
A person in an interdependent relationship with the deceasedA person in an interdependent relationship with the deceased just before they died
 A dependent of the deceased

When does the death benefit tax exist?

The death benefit tax will exist if the death benefit is paid to anyone who is a not a tax dependent.

Accordingly, if the beneficiary who receives the death benefit falls into the definition of a ‘tax dependent as defined in the ITAA, they will not have to pay tax. They will receive the death benefit tax-free.

One of the standout differences is that children over the age of 18 years are not considered ‘tax dependents’. It is for this reason that couples moving through life with adult children must have a considered estate and financial plan to try and minimise any death benefits tax.

What is the rate of tax payable?

The rate of tax payable can be up to 32% including the Medicare levy. 

However, the precise rate of tax will depend on the taxable and non-taxable components of the death benefit. 

This a matter that should be raised with your accountant when you are attending to your estate planning or alternatively if you are managing a deceased estate, all documentation in respect of the death benefit should be provided to an accountant to ensure proper calculation of the rate of tax applicable.

Example scenario:

Molly and Fred have been married for 25 years. Fred has no children. Molly has two adult children from a previous relationship; however, she is estranged from these children.

Fred has superannuation in the amount of around $700,000 and does not have a Binding Death Benefit Nomination.

Molly has no superannuation.

Fred and Molly do not have Wills. 

Fred and Molly pass together in a accident.

Molly has little to no assets in her estate, therefore there is minimal work to be done.

However, Fred’s estate is slightly different. As Fred died without a Will, his estate is governed by legislation. At the time of death, Fred is only survived by his siblings. Fred’s sister, Sally takes on the role of the administrator. Sally liaises with Fred’s superannuation fund and makes a claim to call in Fred’s superannuation death benefit to his estate.

Under intestacy, Fred’s siblings will be the beneficiaries of his estate in equal shares.

The superannuation death benefit is paid to Sally as the administrator of the estate to distribute to Fred’s siblings.

As Fred’s siblings do not fall within the definition of ‘tax dependent’, Sally must ensure that the estate pays the necessary death benefit tax.

If you are due to receive a loved one’s superannuation, or you are the executor or administrator of a deceased estate that is receiving a death benefit, it is crucial you consider whether tax needs to be paid. If you have any enquiries in relation to this, please feel free to contact me.

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Chloe Kopilovic

Written by—

Chloe Kopilovic

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