January 31, 2021
Plan for the Future

What happens to your super after you die? Tax, super benefits & dependants.

It’s not a topic we generally like to think about, but when planning your estate it’s important to know how tax on superannuation death benefits works.

Remember the famous quote, “Nothing is certain, except death and taxes”? That quote could have been invented to describe superannuation death benefits, because it aptly combines both of those subjects. We take a look at some of the different ways that your superannuation death benefits can be taxed, and how this will impact on your dependants.

What is a superannuation death benefit?

A superannuation death benefit is a payment that is made to a dependent beneficiary or to the trustee of a deceased estate after the member of the superannuation fund has died. 

For the deceased’s dependants, this can be paid as:

  • a super income stream
  • a lump sum
  • a combination of both

For the deceased’s non-dependants, this can be paid as:

  • a lump sum

How is tax on superannuation death benefits treated?

Tax on superannuation death benefits is treated in various ways, depending on how the super is paid (income stream, lump sum), and whether beneficiaries are classified as tax dependants.

Who is classified as a tax dependant?

Those who classify as a tax dependant under superannuation and taxation law include:

  • current and former spouses
  • defacto spouses
  • children under the age of 18
  • someone in an “interdependency relationship” with the deceased (lived with the deceased or provided financial, domestic or personal support).

Calculating the taxable component of death benefits

Dependants will need to work out how much of the death benefit qualifies as tax-free, as well as the taxable component the super provider has paid tax on or has not paid tax on.

For taxable super received as an income stream, the tax treatment is dependent on the age of the deceased and the beneficiary:

  • If both participants are under 60 there will be a tax offset equal to 15% of the dependant’s assessable income, including the death benefit. 
  • If both participants are over 60 and the super is paid from a taxed superannuation fund, it is tax free. 

Super death benefits are not taxed when they are paid as a lump sum and go directly to tax-dependants or legal representatives. However, super benefits paid to a non-tax dependant will be taxed at the marginal tax rate.

Non-tax dependants don’t need to pay on the tax-free component of the death benefit, regardless of how the payment is received, their age, or the age of the deceased. A non-dependant cannot take the death benefit as an income stream under superannuation law.

Making sure your loved ones are taken care of

We know that this is a sensitive issue, and our consultants can help you understand the intricacies of how super death benefits are treated. Coming from a place of compassion and empathy, we understand how important it is for you that your dependants and loved ones are cared for in your absence. Our team is always happy to talk if you need more information.

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