Super’s tax effectiveness drops after you die

If you intend to leave your super balance behind in your will, then you’ll need to take some steps to ensure your heirs aren’t paying an exorbitant rate of tax on the inheritance.

Superannuation is a fantastic way to build your wealth in a low-tax environment. As we all know, your super is intended to fund your lifestyle in retirement and reduce your likelihood of relying on the Age Pension.

But many people don’t actually require their superannuation to fund their retirement, using non-super funds instead. For these people, their super account is an asset, one that will be passed on to heirs after they pass away.

Seems like a good plan, right? Well, not if the government has any say in the matter. As mentioned, the government’s intention for that money is to either fund your retirement or support your dependents upon your death.

Superannuation death benefits

In the majority of cases, when a person dies, the balance of their superannuation account is paid to their nominated beneficiary. These are known as superannuation death benefits.

This beneficiary must be a ‘tax dependent’, which can include a spouse, dependent child aged under 18 or a dependent child over 18 with a disability, as well as anyone you have nominated to be your legal personal representative (LPR).

If you die without nominating anyone as your beneficiary, your super fund will investigate and determine who your dependents are, and distribute your funds accordingly.

Your tax dependents will pay no tax on the inherited super balance.

What if I don’t have tax dependents?

With such a limited scope for who can be considered a tax dependent, it’s easy to imagine a situation where a person dies with no spouse or dependent children. What happens to the super balance then.

If you don’t have dependents, then you can give instructions on who receives your super in your Will. This can be anyone and does not have to be a spouse or anyone dependent on you in any way.

In this case, you would list your LPR as the beneficiary and the funds would be distributed according to your instructions.

But – and it’s a big but – super funds received by non-dependents are taxed at the full rate of between 17 and 32 per cent, meaning virtually all the tax saved by using superannuation will now be payable by your heirs.

A super inheritance is separated into two parts for taxation purposes – the ‘taxed component’ that attracts tax and a ‘tax-free component’ that doesn’t.

Can you avoid this tax trap?

One way to avoid to this trap is to withdraw a lump sum from your super while you are still alive. If you are over the super preservation age (currently 59) you are able to withdraw as much of your super as you like without penalty.

Since the abolition of death duties in 1979, your beneficiaries will not pay tax on cash inherited from your bank account. This loophole does require some forward planning if it is to be effective.

Another option is what’s known as a Superannuation Testamentary Trust (STT). An STT is a type of trust created in your Will that comes into effect upon your death.

The most effective way to avoid the tax obligation is to make the trust ‘discretionary’, so the Trustee (the person you nominated to manage the trust) can provide funds to your beneficiaries as and when it is needed.

Since payments from a trustee to a beneficiary are not taxed, this avoids the inheritance tax.

Have you nominated a beneficiary for your super? Have you drawn up a Will? Let us know in the comments section below.

Also read: Super scam attempts jump by over 200 per cent

Brad Lockyer
Brad Lockyer
Brad has deep knowledge of retirement income, including Age Pension and other government entitlements, as well as health, money and lifestyle issues facing older Australians. Keen interests in current affairs, politics, sport and entertainment. Digital media professional with more than 10 years experience in the industry.


  1. I was aware of this Super ‘loophole’ … but it sounds too easy to avoid paying this ‘death tax’.

    Perhaps many don’t realise that Super comes in ‘two flavours’, Taxed and Untaxed.

    What readers should now do is check out how much ‘Untaxed’ $$$ is in their Super nest Egg to see how much a STT is relevant to those who may inherit any ‘left over’ Super $$$$’s when you die.

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