Have the rumours of the return of death taxes been real or fake? Regardless, there are still a handful of existing taxes in Australia which could apply to assets or money passed on from a deceased to their beneficiaries.

Superannuation is one area which is often overlooked. Many assume that their superannuation is dealt with via their will. In reality, superannuation is only dealt with by your will if, where applicable, the trustee of the super fund elects to pay it to your estate.

Most super funds nowadays have an option to nominate where one wants their member balance paid upon death. This could be via binding or non-binding death benefit nominations, reversionary pensions or even a superannuation proceeds trust. Depending on the kind of nomination offered by the fund, one can exercise different levels of influence over their superannuation.

The tax legislation advises that a number of factors can influence how tax is applied to your super benefits, such as your age and whether your super comes from a taxed or untaxed source.

The tax treatment of death benefits is also affected by whether the benefits are paid as a lump sum or an income stream (i.e. regular payments). Additionally, whether you were a tax dependant of the deceased can affect how you receive the death benefit and the resulting tax consequences.

When reviewing one’s succession and estate planning strategy, we often come across super fund nominations for part or all of the member’s benefit being made to non-tax dependant adult beneficiaries. It is important to give consideration to the potential tax liabilities that may arise when such nominations are effected. A non-tax dependant beneficiary can only receive the benefit as a lump sum and tax will be payable on the ‘taxable component’ of the payment as follows:

  • taxed element – maximum of 15 per cent plus Medicare levy
  • untaxed element – maximum of 30 per cent plus Medicare levy

It is worth noting that tax will be payable regardless of the beneficiary’s or the deceased person’s age.

On the other hand, it is often also assumed that superannuation benefits received by a dependant of the deceased will always be tax free in their hands. This is not the case as in certain circumstances, depending on age and the type of death benefit being received, tax can be payable at the marginal tax rate of the dependant. In those cases, the beneficiary may be entitles to 15 per cent tax offset.

Outside of superannuation, other types of inheritance are distributed based on the deceased person’s will. In an example of inheriting an asset from an estate (assumed to be purchased by the deceased post 20 September 1985), the beneficiary is not only inheriting the asset itself but also the unrealised capital gains tax (CGT) liability attached to it. If the asset is later sold, the beneficiary would be required to pay CGT on the proceeds of the sale. Additionally, any income you are entitled to and receive as a beneficiary of an estate will be assessable to you as normal income.

Death benefit rules are complex and each individual’s specific set of circumstances will be different. Whilst a morbid topic, it is important to identify an adviser who will work together with your estate planning lawyer to discuss the two certainties of life – death and taxes.