Tax and the super after-life

Many people assume there is no tax payable on super benefits received after someone passes away, but that’s not always the case.

Whether or not tax is paid on a super death benefit depends on the beneficiary’s relationship with the deceased. Although some beneficiaries receive their money tax-free, others can find themselves paying significant amounts of tax on the funds they receive.

Dependant for tax purposes

The key point in understanding who will be required to pay tax on a super death benefit is whether or not the beneficiary is considered a death benefit dependant for tax purposes.

Although you are permitted to nominate a wide range of people as dependants under super law, the definition for tax purposes is different and narrower.

A death benefit dependant for tax purposes is limited to the deceased’s spouse, de facto, or former spouse or de facto; their child under age 18; any person with whom they had an interdependency relationship; and any other person financially dependent on them just before their death.

A common trap in this area is nominating financially independent adult children as death benefit beneficiaries, as this is permitted under super law. Under tax law, however, they are not defined as dependants for tax purposes and so are required to pay tax on the taxable component of any death benefit they receive.

Tax on lump sum death benefits

When it comes to paying a death benefit, your dependants for tax purposes are free to choose whether they want to receive your super death benefit as a lump sum or as an income stream.

If a beneficiary decides to take their benefit as a lump sum, the benefit will be free of any tax, provided they are considered a death benefit dependant under tax law.

If they are not considered a death benefit dependant for tax purposes, they must take the benefit as a lump sum. These lump sums are taxed at a maximum rate of 15 per cent plus the Medicare levy on the taxed element (which is super that has already had tax paid on it within the fund).

In addition, any untaxed elements of the taxable component in the lump sum will be taxed at a maximum rate of 30 per cent plus the Medicare levy.

If the benefit is paid to the estate, it is paid as a pre-tax lump sum and the estate is responsible for paying any necessary tax depending on the dependant status of the end-beneficiaries.

Death benefit income streams and tax

Some tax dependants prefer to take their death benefit as an income stream (or pension).

Death benefit income streams are tax-free if either the deceased or the beneficiary are aged 60 or older at the time the income stream payments are made.

Otherwise, beneficiaries will generally pay some tax on the death benefit income stream until they reach age 60, after which age the payments are tax-free.

For beneficiaries under age 60, there is no tax on the tax-free component of the death benefit income stream, but the taxable component is included in their assessable income with a 15 per cent tax offset.

Death benefits and the transfer balance cap

The transfer balance cap (TBC) rules also come into play when it comes to super death benefits.

These rules limit the amount of super savings you can transfer into the retirement or pension phase.

Tax penalties apply if amounts in excess of the beneficiary’s TBC are transferred into the retirement phase as an income stream.

The rules governing this area are very complex, so you should always seek professional advice before deciding on a death benefit nomination, as it can make a big difference in how much tax your beneficiaries will pay when they receive their death benefit payment.

If you would like more information about tax and super death benefits, call our office today.

Important: This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on print
Share on email

Gold Coast

Phone:  07 5580 9489

Suite 1303, Lakeside 2, Bermuda Point, 1 Lake Orr Drive, Varsity Lakes, QLD 4227

Email : [email protected]

Mailing Address:
PO Box 1040 Burleigh Heads QLD 4220

Mon - Fri: 9am - 5pm
Sat - Sun: Closed

Eight Mile Plains

Phone:  07 3392 0077

Level 1 Suite 2 4 Clunies Ross Ct, Eight Mile Plains Qld 4113

Email : [email protected]

Mon - Fri: 9am - 5pm
Sat - Sun: Closed

Spring Hill

Phone:  07 5580 9489

Suite 3, 290 Boundary St, 
Spring Hill, Queensland 4000

Email : [email protected]

Mon - Fri: 9am - 5pm
Sat - Sun: Closed