Superannuation Death Taxes

Superannuation will be one of your biggest assets and along the journey of your working life and in retirement, it is treated to some very favourable tax concessions that encourages Australians to save for retirement.

Despite the generous tax concessions, you should be aware of the potential taxes that apply to certain beneficiaries upon your death. This tax can be in the tens of thousands for certain beneficiaries, such as adult children.

In this article, we share some tips on who can be nominated to receive your superannuation death benefit, and how to structure your superannuation to save on these death taxes.

Firstly, it’s important to understand that your choices are limited on who can be nominated to receive your death benefit, unlike your personally held estate assets which are governed by your Will.

It’s a common misconception that your Will would control who receives your superannuation, but this is generally not the case, as superannuation is held in a trust structure and essentially not a personally held asset. So, it’s important you provide your instructions directly to your superannuation fund.

Whether your superannuation is held in the accumulation phase or retirement income phase, your superannuation fund will allow you to choose your beneficiary nominations:

• Non-binding nomination – This is more or less your preference, with the fund trustee having the final discretion on who should receive a death benefit payment.
• Binding nomination – This provides more certainty, as the fund trustee is bound to making the death payment to the beneficiary nominations, as long as it’s a valid nomination.
• Reversionary nomination – This option only applies for income stream accounts, and allows for the account to remain active and the ownership is transferred to either a spouse or child under 18.

If you were to pass away without a beneficiary nomination, the superannuation trustee will make the decision on your behalf, based on who should receive the benefit and guided by superannuation law.

Superannuation death benefits are paid as lump sums or as income stream, and we have focused most of this article on the basis of a lump sum payment.  

Lets look at who can get your super when you die?

• Your spouse or de-facto partner
• Your children (Any age)
• Financial dependent – Someone who relies on you financially
• Interdependent relation – This is someone who you have a close personal relationship where one or both provide financial, domestic support and personal care.
• Listed personal representative (Executor of your sstate) – This is when the death benefit can be paid to the estate and then distributed in accordance with your Will.

Nominations can be made to more than 1 person, as long as they are valid recipients and the total nomination equals 100%.

Some people may want to nominate their brother, sister, best friend or niece/ nephew, but it’s important to understand that your choices are limited to the previously mentioned superannuation dependents, and any other nominations may be invalid.

Another question we get asked quite often, is can I make a 100% nomination for my spouse but also a secondary nomination for my kids in the event that my spouse dies before me? The answer is that you can only make one nomination at any one point in time, and there are no provisions for contingency nominations. In most cases, it’s a matter of updating your nomination if there are changes to your intended beneficiaries.

So how will a death benefit be taxed?

The amount of tax withheld will be determined by firstly, who receives the benefit and secondly, what are the tax components.

Superannuation balances consists of 3 different tax components:

• Taxable – Typically made up of a rolling total or employer contributions, salary sacrifice and investment earnings.
• Tax free – As the name suggests, the origins of this component would typically come from tax free member contributions.
• Untaxed – Which is not very common, so I won’t dive into this for the purposes of this article, but keep an eye out for it if you have a government or public super fund.

These tax components are typically not shown in your end of year statements. A good tip is to contact your super fund and ask for the breakdown of your tax components.

Earlier we described who can be nominated as superannuation dependents to receive a death benefit under superannuation law. From a tax perspective though, there are differences to who the ATO classifies as “tax dependents”, as shown in this table.

You’ll notice there are similarities in tax dependent definition to superannuation dependent definition.

However, the main difference worth noting is that the tax law doesn’t capture a child aged 18 and over as a tax dependent. This can have a bearing for nominating adult children and who also may not satisfy any other criteria, such as financial dependent.

As shown here, any tax free component of your death benefit is paid with no tax withheld, regardless of the tax dependency status. However, for the taxable component, any amount paid to a non-tax dependent, such as an adult child, would have 15% tax plus Medicare levy, applied to the Taxable component.

Using this case study, we can see that Frank has passed away leaving $400,000  in super, mostly made of $350,000 in the taxable component and $50,000 in tax free. In the case that his widow, Gwen, receives the death benefit, the full amount is passed on and no tax withheld.

However, if Gwen pre-deceased  Frank, and his nomination is changed to Lisa, his adult daughter, she is considered a valid beneficiary nomination but not classed as a tax dependent. Therefore, 15% tax plus ML is applied to the Taxable component or approximately $59,500 tax withheld, receiving a lump sum of $340,500.

From an estate planning perspective to preserve more of your savings for your beneficiaries, you can consider what super assets and other estate assets should flow through to certain beneficiaries with different tax treatment. It’s best to discuss with your family solicitor or estate planning specialist for advice.

As financial planners, we consider superannuation recontribution strategies for clients to effectively reduce the taxable component and converting to the tax free component. This strategy involves careful planning and the benefits for the estate can be significant.

I would strongly recommend financial advice to consider the merits of any superannuation recontribution strategy, which is subject to many conditions. A comprehensive plan would factor in the value for your estate and leaving more for your loved ones.

Shaun Jones MAppFin (FP) 
Financial Planner at About Retirement