There was $3.7 trillion in funds sloshing around in Australian super accounts at the end of the December 2023 quarter, according to the Association of Superannuation Funds of Australia.
Now we’d love to think we all spent every penny of that money supporting ourselves and doing things we love, but the reality is many people die with money still in the pot. However, the transfer of money to any heirs is not quite as simple as you might imagine.
So what happens when you inherit superannuation?
Start the process
Well, before you inherit, you have to contact the fund to let them know the person has died and ask them to release the person’s super. Each fund will have a different process for this, but at the very least you will have to produce a range of paperwork including a death certificate, some form of identification, a marriage certificate if you are the spouse of the deceased and often a will and birth certificate of the deceased.
If the account had death insurance cover, the super fund will send copies of the birth and death certificates to the insurer. The insurer must inform the super fund within five days if the deceased member was eligible for a death benefit payment.
According to the Australian Taxation Office (ATO), when a person dies, in most cases, the fund pays the remaining super to the nominated beneficiary. This is called a super death benefit.
But it’s not free money, the ATO often wants a slice.
Enter the tax man
According to MoneyMag, the tax on the super death benefit depends on:
- whether the person receiving the benefit is a dependant or non-dependant of the deceased person
- whether the benefit is paid as a lump sum or super income stream
- whether the super is taxable or tax free, and whether the super fund has already paid tax on the taxable component
- the age of the person receiving the benefit
- the age of the deceased person when they died.
It sounds complicated, because it is. No-one has ever said the tax office likes to make things easy for you.
Frankly, we don’t have space to go into the very dense legislation behind the law here, but the MoneyMag (mentioned above) is a terrific guide to how much you can expect to pay. It may be a good idea to consult a tax accountant if you inherit a significant sum from a superannuation account.
As a general rule, death benefits paid to dependants are tax free, and are taxed at a higher rate when paid to non-dependants.
Lump sum or income stream
If a death benefit is paid to a dependant of the deceased, it can be paid as either a lump sum or income stream.
If a death benefit is paid to someone who is not a dependant, it must be paid as a lump sum.
Dependants under superannuation law usually include:
- a surviving spouse or de facto spouse
- a child of the deceased who is under age 18
- any other person who was financially dependent on the deceased
- any person who had an interdependency relationship with the deceased
For the record, an interdependency relationship exists between two people if all of the following conditions are met:
- they have a close personal relationship
- they live together
- one or both provides the other with financial support
- one or both provides the other with domestic support and personal care.
It’s worth noting that dependants under tax law and superannuation law are different. Tax law defines a dependant as any one of the following:
- 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
- any other person dependent on the deceased.
- 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
- any other person dependent on the deceased.
Centrelink payments
Centrelink clients must notify Centrelink within 14 days of a change of circumstances, including the death of a spouse or someone you expect to inherit money from. This is because there are rules about assessment of income streams depending when the person dies and when the person who inherits the money becomes entitled to that money.
If the superannuation fund knocks back your claim on the death benefit, your first step is to lodge a complaint with the fund. Check with the fund as to how long you have to lodge a complaint, but most are about 28 days.
If you are not happy with the outcome of your complaint, you can contact the Australian Financial Complaints Authority. This is a free service, which is good because your next step is legal action, which can be costly.
Have you inherited superannuation? Why not share your experience in the comments section below?
Also read: Who should be in your will? The key people you can’t leave out