What happens to your superannuation when you die?
When a person dies, their superannuation provider pays their remaining super to their nominated beneficiary (in most cases). Super paid after a person’s death is called a ‘super death benefit’.
Depending on the rules of your super provider, you can nominate the beneficiary for your super with your provider. This nomination may be binding or non-binding.
Binding death nomination
If a binding death benefit nomination is allowed, one or more dependants, or your legal personal representative, can be nominated to receive your super.
If a deceased person did not make a nomination, the trustee of the provider may:
- use their discretion to decide which dependant or dependants the death benefit is paid to
- make a payment to the deceased’s legal personal representative (executor of the deceased estate) for distribution according to the instructions in the deceased’s will.
Non-binding death nomination
If a non-binding nomination was made by the deceased, the trustee of the provider may:
- use their discretion to pay in accordance with the non-binding nomination
- make a payment to the deceased’s legal personal representative (executor of the deceased estate) for distribution according to the instructions in the deceased’s will.
Contact your provider to find out more on death benefit nominations.
Dependants of the deceased
If you’re a dependant of the deceased, the death benefit can be paid as either a lump sum or income stream. If you’re not a dependant of the deceased, the death benefit must be paid as a lump sum.
Different rules exist for who is a dependant when making a super death benefit payment (superannuation law) and the resulting tax treatment (taxation law).
Super law sets out who a death benefit is payable to and taxation law sets out how the benefits will be taxed.
Who is a dependant under superannuation law
For the purposes of who can receive a death benefit payment, you are a dependant of the deceased if at the time of their death you were:
- their spouse or de facto spouse
- a child of the deceased (any age)
- a person in an interdependency relationship with the deceased.
If you would like to leave your super to someone who is not a dependant under the super laws, contact your provider about making a binding death benefit nomination to have the payment made to your legal personal representative. This will ensure your super is distributed according to your will.
Who is a dependant under taxation law
For tax purposes, you are a dependant of the deceased if at the time of their death you were:
- 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.
Two people may also have an interdependency relationship for tax purposes if they have a close personal relationship, and the reason they do not satisfy one or more of the other requirements of an interdependency relationship listed above is that either or both of them suffer from a physical, intellectual or psychiatric disability.
Financially dependent on the deceased means you relied on them for necessary financial support. Children over 18 years old must be financially dependent on the deceased to be considered a dependant.
There are limitations on who can receive a death benefit income stream. Adult children can only receive an income stream if they are under 25 years old and financially dependent on the deceased or have a permanent disability.
Adult children with a permanent disability can continue to receive an income stream after they turn 25 years old. In all other situations the income stream must change to a lump sum on or before the date they turn 25 years old.
How to apply
If you believe you’re the beneficiary of a deceased person’s super or are the trustee of a person’s estate, contact their provider to let them know the person has died and ask them to release the person’s super.
How tax applies
The tax on a death benefit depends on:
- whether you were a dependant of the deceased under taxation law
- whether it is paid as a lump sum or income stream
- whether the super is tax free or taxable and whether the provider already paid tax on the taxable component
- your age and the age of the deceased person when they died (for income streams).
If you’re a non-dependant of Australian Defence Force and police personnel who died in the line of duty, the lump sum super death benefits you receive have the same tax treatment as a benefit paid to a dependant.
If you’re the trustee of a deceased estate, the estate pays tax on behalf of the beneficiaries of the super. The amount of tax the estate must pay is the same as if the payment was paid directly to the beneficiary.
If you are a dependant of the deceased
To work out how your super payout will be taxed, you need to know how much of the money in your death benefit is a:
- tax-free component
- taxable component the super provider has paid tax on (taxed element)
- taxable component the super provider has not paid tax on (untaxed element).
Tax-free super
You don’t pay tax on the tax-free component of your super where you:
- withdraw it as a lump sum
- receive an account-based income stream.
You will be required to include the tax-free component in your assessable income (where it will be taxed at your marginal rate) where you are in receipt of a capped defined benefit income stream and:
- it is a death benefit income stream where the deceased was aged 60 years or over at the time of their death
- you are older than 60 years and the combined total of your tax-free component and taxed element (taxed source) is in excess of your defined benefit income cap.
Taxable super received as a lump sum
If you’re a dependant of the deceased, you don’t need to pay tax on the taxable component of a death benefit if you receive it as a lump sum. Don’t include it on your tax return as income.
Taxable super received as an income stream
If you are a dependant and you receive a death benefit that is a capped defined benefit income stream, you will pay tax.
Read more: What happens to your super when you die
Do you understand the tax laws relating to superannuation? Have you been the beneficiary of a death benefit payment? Share your experience in the comments below.