Superannuation death benefits payments are potentially taxable depending on who receives it and the components of the super payment.

Generally, superannuation has two components, a tax-free component and a taxable component. The components can usually be found on your fund statement. The tax-free component is tax free, regardless of who receives the benefit. However, the taxable component may be taxed as follows:

1. If paid to a ‘death benefit dependant’ both components are tax free. An eligible death benefit dependant is one of the following:

  • Spouse, whether married or de facto
  • A former spouse
  • A child under 18 years
  • A child over 18 years, who was actually dependant on the deceased member at the time of death
  • Any other person who is actually dependant on the deceased member at the time of death.

2. If the death benefit is received by someone who is not a ‘death benefit dependant’, the taxable component is taxed at 15% plus Medicare levy of 2%. If the death benefit is paid to the Legal Personal Representative (Executor) and distributed to a person who is not a ‘death benefit dependant’ the estate pays a tax of 15% but no medicate levy. If a death benefit includes a life insurance benefit, then the life insurance component can be taxed at 30%.

Consider the following example

Tom (aged 64 years) is a retired widower who has two adult children, Ted and Tess. Ted is married with children, and Tess is single and still lives at home with Tom. Tom has a nomination in place dividing any super death benefit equally between Ted and Tess. Tom’s Will leave all assets equally to Ted and Tess. Tom dies leaving a death benefit of $1 million made up as follows:

  • $500,000 tax free component
  • $500,000 taxable component

As Tess qualifies as a ‘death benefit dependant’, she receives $500,000 tax free. However, as Ted is not a death benefit dependant, he receives $457,500 after paying tax of $42,500.

Could Tom have taken steps to minimise the tax consequences of his death? Yes, as set out below.

  1. As Tom is over 60 years old and retired, he could have withdrawn his super prior to his death, and the withdrawal would be tax free. The super proceeds would then form an asset of his estate and passed tax free to Ted and Tess.
  2. Tom should have in place an Enduring Power of Attorney (EPA) appointing Ted and Tess as financial attorneys. If Tom was incapacitated, Ted and Tess could use the EPA to withdraw the funds prior to Tom’s death. The funds would be received on behalf of Tom and would be tax free.
  3. Assuming that there was no opportunity to withdraw the super before Tom’s death, the tax could have been minimised by Tom opting to pay the super death benefit to his Executor, so it passed to Ted and Tess via Tom’s estate. That would reduce the tax on the taxable component from 17% to 15%, a saving of $5,000.

This article was first published in Personal Wealth Adviser – Issue 1.