Understanding Superannuation Death Taxes and Benefits

There are 2 things for certain in our lifetimes, Death and Taxes, so they say. We wanted to clear the clear the air and help you understand how you can avoid some of the taxes that apply in the event of a death and what happens with your superannuation benefits.

Superannuation Benefits on Death of a Member

In an instance when a lump sum benefit is paid from a superannuation fund where a member has died and the ultimate recipient of that payment is not classified as a ‘tax dependant’. In this situation, the ‘taxable’ portion of the benefit payment is subject to a tax rate of 15%, plus the 2% Medicare levy, a total tax take of 17% (where insurance proceeds are included in the payment it can be as high as 32%).

What Qualifies a Tax Dependant?

A tax dependant is classified as the following:

Death benefits dependant: A dependant (as defined under the taxation laws) is also known as a death benefits dependant, and can be the deceased fund member’s spouse, or child under the age of 18, and anyone who has an interdependency relationship with the member (including adult children). Any other person who is financially dependent on a member (including adult children) is also treated as a dependant (as defined under the taxation laws).

The ‘taxable’ portion of a super death benefit is subject to tax, where a person receives it who is not a dependant for income tax purposes. Any ‘tax-free’ component is exactly that, tax-free in the hands of the beneficiary. The ‘tax-free’ component is basically made up of after-tax contributions that the member has made to superannuation. Consequently, a common strategy to ‘wash’ taxable components to tax-free, prior to a member dying, is the re-contribution strategy.

How To Avoid These Taxes?

If you are still reading, then you are wondering how you can avoid some of these taxes, so here are some tips for you:

  1. Don’t die (I believe medical science is working on this and making progress J)
  2. Make sure you have a beneficiary that qualifies as a dependant for income tax purposes at the time of death
  3. Ensure 100% of your benefits form part of the tax-free component
  4. Have nothing inside superannuation at the time of death.

I hope you have found this useful, the potential for a significant tax to apply to a payment from a superannuation fund as the result of the death of a member, an overall estate plan review should consider intergenerational wealth transfer and preserving that wealth by reducing tax.

Who would be better than your accountant to help with this process? Getting your estate plan in order is always a good idea, so call us today to book it in!