A common misconception in estate planning is that all you need is a Last Will & Testament. While this is a critical element it leaves what will be among most people’s largest assets, the balance of your superannuation account, unspoken for.
When a person dies, in most cases their super provider pays their remaining super to their nominated beneficiary. Super paid in this manner is called a ‘super death benefit’. Who receives the super death benefit must be nomination in a non-binding or binding manner with your super provider.
A binding death benefit nomination will allow you to nominate one or more dependents or your legal representative to receive your super. In your passing the super provider will distribute the remaining balance accordingly.
If a deceased person did not make a nomination, the trustee of the provider may:
- use their discretion to decide which dependent or dependents the death benefit is paid to; or
- make a payment to the deceased’s legal personal representative (executor of the deceased estate) for distribution according to the instructions in the deceased’s will.
The same options may be exercised by the super fund if non-binding nominations were made.
Note though that you can only nominate dependents (as defined under Superannuation Law) or a legal representation to be the recipient of your super in your passing.
This poses the question, “Who is a dependent for the purpose of my super?”
To be considered a ‘’Dependent” of the deceased under Superannuation Law you must have one of the following relationships with the deceased.
- Spouse or de facto spouse
- a child of the deceased (any age)
- a person in an interdependent relationship with the deceased i.e.
- You have a close personal relationship
- You lived together
- One or each of you provided the other with financial support; and
- One or each of them provides the other with domestic support and personal care
Being classified as a dependent under Superannuation Law will allow an individual to be a recipient of a super death benefit. Alternatively, it will allow you to nominate someone as a beneficiary of your super when the time comes. However, if you wish to bestow money from your super to an individual who does not fall within the definition of a dependent it will be important to contact your provider about making a legal representative a binding death benefit nomination. This will ensure they have the power to distribute your super according to your will.
Regardless of your “dependent” status under Super Law, how an individual is tax on a super death benefit is determined under Tax Law. There are several factors that can influence the how the recipient of a super death benefit is tax (which can be found here) but the key factor in determining the tax treatment is whether you were a dependent of the deceased under taxation law.
If you are not a dependent under Tax Law, the tax treatment is relatively straight forward.
Firstly, the tax-free super competent which represents the amounts that were paid into the super fund out of after-tax income (such as voluntary super contribution where no tax deduction was claimed). This portion of the super death benefit will be tax free income to the recipient regardless of their circumstance or relationship with the deceased.
The second element will be the taxable portions of the super. This potion can be broken into two sections Taxed & Untaxed, which represent the amounts that have been taxed 15% and the amounts that have never been taxed, respectively. The Taxed portion will be taxed at the lower of 17% or the recipient’s marginal rate. The Untaxed portion will be taxed at the lower of 32% or the recipient’s marginal rate.
Overall, this can be summarized as:
| Component | Tax Treatment |
| Tax-free Component of Super | No tax paid by recipient |
| Taxable Component – Taxed portion | Lower of 17% or the recipient’s marginal rate |
| Taxable Component – Untaxed portion | Lower of 32% or the recipient’s marginal rate |
To be considered a dependent of the deceased for tax purposes you must have had on of the following relationships.
- their spouse or de facto spouse (of any sex)
- a former spouse or de facto spouse (of any sex)
- a child of the deceased under 18 years old
- in an interdependency relationship with the deceased (same conditions as quoted for Superannuation Law apply)
- any other person dependent on the deceased.
If the definition of dependent under Tax Law is satisfied, the tax treatment will depend on the age of the deceased and the age recipient and whether the benefit is paid as a lump sum. Additionally, the super death benefit will break down into Tax-free, Taxed and Untaxed components as defined in the above paragraph on non-dependents.
The key leniency offered to dependents is more favorable tax treatment.
There are slight variations for each of the age combinations of deceased and recipient (which can be found here), but overall it will be common for dependents to be taxed as follows:
| Component | Tax Treatment |
| Tax-free Component of Super | No tax paid by recipient |
| Taxable Component – Taxed portion | Tax free if received as a lump sum. Payments made as an income stream have different tax implications depending on age of deceased and beneficiary. |
The tax treatment of payments can be complex and it best to seek professional tax advice before you make decisions around your estate planning.
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