Super Death Benefit

Normally, a member’s benefits must be paid as soon as possible after the member dies. If the recipient is a dependant of the member, the benefits may be received as an income stream. If the recipient is not a dependant, the benefits must be paid in a single lump sum, or as an interim lump sum and a final lump sum. The benefits may, instead of being paid, be rolled over as soon as possible for immediate payment.

A superannuation fund can only directly pay a superannuation death benefit to a person who is a dependant as determined for superannuation purposes. A non dependant can only receive a superannuation death benefit indirectly through the deceased’s estate. A superannuation death benefit is not subject to tax if it is paid to a dependant of the deceased but if received by a non dependant it will be taxable.

For tax purposes, a dependant of death benefits of a person who has died is:

• the deceased person’s spouse or former spouse
• the deceased person’s child less than 18 years old
• any person with whom the deceased person had an interdependency relationship just before he or she died, or
• any person who was financially dependent on the deceased just before he or she died

Section 10A of the SIS Act defines an “interdependency relationship” (for the most part) as follows:

1. Where 2 persons (whether or not related by family) have an interdependency relationship if:

• They have a close personal relationship; and
• They live together; and
• One or each of them provides the other with financial support; and
• One or each of them provides the other with domestic support and personal care.

2. Where the 2 persons have a close personal relationship but cannot satisfy the other requirements in (1) and the reason they do not satisfy the other requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

The spouse of a deceased person means not only a person to whom the deceased person was legally married, but extends to:

• a person who, although not legally married to the deceased person, lived with the deceased person on a genuine domestic basis in a relationship as a couple, and
• a person with whom the deceased person was in a relationship that is registered under a state or territory law prescribed.

A death benefits dependant of a person who has died includes the deceased person’s former spouse which means an individual who was the spouse of the deceased sometime in the past. This includes an individual who was a spouse of the deceased in a same sex relationship even if the relationship ended before 1 July 2008, that is, before the definition of spouse was amended to include same sex couples.

A death benefits dependant of a person who has died includes the deceased person’s child less than 18 years old. A child of a deceased person includes:

1. an adopted child, a stepchild or an ex nuptial child of the person
2. a child of the person’s spouse, and
3. a child of the person within the meaning of the Family Law Act 1975.
4. Under the Family Law Act 1975, child has not only its ordinary meaning, but also includes:

• a person born to a woman because of an artificial conception procedure while the woman was married to, or the de facto partner of, another person of the same or opposite sex; and
• a person who is a child of a person because of a state or territory court order giving effect to a surrogacy agreement.

The definitions of spouse and child mean that a person in a same sex relationship and a child of a person in a same sex relationship are, for superannuation purposes, treated the same from 1 July 2008 as other spouses and children.

The definition of a death benefits dependant before 1 July 2008 that is before it extended to same sex relationships meant that a member of a same sex couple who received their deceased partner’s superannuation death benefit was only taxed concessionally that is as a death benefits dependant if the person satisfied the criteria for an interdependency relationship with the deceased member or was financially dependent on the deceased member. The person could not otherwise receive the deceased member’s benefits as a reversionary pension and would be taxed as a non dependant on lump sum death benefit payments.

Two persons have an interdependency relationship if all of the following criteria are met:

• they have a close personal relationship
• they live together
• one or each of them provides the other with financial support, and
• one or each of them provides the other with domestic support and personal care

There are matters that are to be taken into account (where relevant) in determining whether 2 people have an interdependency relationship as follows:

• the duration of the relationship
• whether or not a sexual relationship exists
• the ownership, use and acquisition of property
• the degree of mutual commitment to a shared life
• the care and support of children
• the reputation and public aspects of the relationship
• the degree of emotional support
• the extent to which the relationship is one of mere convenience
• any evidence suggesting that the parties intend the relationship to be permanent, and
• the existence of a statutory declaration signed by one of the persons to the effect that the person is (or was) in an interdependency relationship with the other person.

The circumstances in which a person is financially dependent:

• the financial contribution by the deceased must be examined to determine whether it is necessary and relied on to maintain the person’s normal standard of living, and
• the financial contribution does not necessarily have to be more than 50% before it can be said that there is substantial support by the deceased.

Lump sum superannuation death benefits paid to non dependants are treated the same as death benefits to dependants where the deceased died in the line of duty as a member of the defence force, as a police officer or as a protective service officer.

If you would like to leave your super to someone who is not a dependant under superannuation law, ask your super fund 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.

If you believe you’re the beneficiary of a deceased person’s super or are the legal representative of a person’s estate, you should contact their super fund to let them know that the person has died and ask them to release the person’s super.

The taxable component of a complying superannuation fund typically includes:

1. Employer contributions made on behalf of the person.

2. Any personal contributions made by the person for which a tax deduction was claimed.

3. Earnings on the fund’s contributions and investments.

The taxable component may also have two elements:

Taxed element: This element has already been subject to tax within the superannuation fund at the concessional rate of 15%. It typically forms the main part of the taxable component for funds known as “taxed funds.”

Untaxed element: This element has not been subject to tax within the superannuation fund and might arise in certain superannuation funds where the employer contributions have not been taxed or in funds which have received a transfer of benefits from an untaxed source, such as certain public sector superannuation schemes.

The taxable component of the superannuation lump sum that a non-death benefits dependant receives is assessable income while the tax-free component is not assessable income and is not exempt income.

The tax rates for someone who is a non-dependant are 15% of the element taxed in the fund and 30% for the element untaxed in the fund in respect of the taxable component. The tax rates are maximum rates of tax. The entire taxable component of the lump sum death benefit is included in the non-dependant recipient’s assessable income and a tax offset applies to effectively cap the maximum rate. The Medicare levy is not payable on a death benefit paid to a trustee of a deceased estate.

 The tax free component of a superannuation fund consists of the contributions segment and the crystallised segment. Broadly, the contributions segment relates to non-assessable contributions received after 30 June 2007. The crystallised segment relates to certain amounts that were tax-free prior to the change in the superannuation law that happened at 30 June 2007.

Law Companion Ruling LCR 2017/3 provides guidance on the tax and regulatory treatment of superannuation death benefits and the treatment of death benefit income streams under the transfer balance cap provisions. What follows is a summary of what this ruling says.

For dependant beneficiaries, superannuation death benefits can be cashed:

• As a superannuation lump sum that is paid out of the superannuation system.
• That are retained in the superannuation system (from 1 July 2017 such superannuation income streams must also be in the retirement phase); or
• A combination of the two.

Where the deceased member’s interest is retained within the superannuation system and cashed to a dependant beneficiary in the form of a death benefit income stream, a credit arises in the dependant beneficiary’s transfer balance account.

A death benefit income stream can either be reversionary or non-reversionary.

A reversionary death benefit income stream is a superannuation income stream that reverts to the reversionary beneficiary automatically upon the member’s death. The superannuation income stream reverts in this manner because the governing rules of the agreement/standards under which the superannuation income stream is provided expressly provides for reversion, as opposed to the superannuation provider exercising a power or discretion to determine a benefit in the beneficiary’s favour.

Administrative steps that may cause delay in the reversion of the income stream to the beneficiary such as obtaining bank account details and other information does not preclude the superannuation income stream from being reversionary.

A non-reversionary death benefit income stream is a new superannuation income stream created and paid to the dependant beneficiary or beneficiaries.

Transfer balance credit for a reversionary death benefit income stream

If you are the recipient of a reversionary death benefit income stream, you are a reversionary beneficiary and a transfer balance credit arises in your transfer balance account. The time at which the credit arises is:

For death benefit income streams commencing before 1 July 2017, the later of 1 July 2017 or 12 months from the day the death benefit income stream first become payable.

For death benefit income streams commencing on or after 1 July 2017, 12 months from the day (the starting date) when you started to be the retirement phase recipient of the death benefit income stream.

The reason for the 12 month delay for the transfer balance credit to arise is to give the reversionary beneficiary sufficient time to adjust their superannuation affairs before consequences, such as a breach of the transfer balance cap, takes effect.

The transfer balance credit that arises in the reversionary beneficiaries transfer balance account is equal to the value of the superannuation interest that supports the death benefit income stream:

For death benefit income streams commencing before 1 July 2017, the value just before 1 July 2017.

For death benefit income streams commencing on or after 1 July 2017, the value on the “starting day”.

Transfer balance credit that arises for non-reversionary death benefit income stream

If you are the recipient of a non-reversionary death benefit income stream, a transfer balance credit arises in your transfer balance account on the later of 1 July 2017, or when you start to be the recipient of the death benefit income stream (that is, when you become entitled to be paid the death benefit income stream).

The transfer balance credit is the value of the superannuation interest that supports the death benefit income stream:

• For death benefit income streams commencing before 1 July 2017, the value just before 1 July 2017.
• For death benefit income streams commencing on or after 1 July 2017, the value when the dependant beneficiary becomes entitled to be paid the death benefit income stream.

This value may include any investment earnings that accrue to the deceased member’s interest between the date of death and the date the dependant beneficiary becomes entitled to be paid the death benefit income stream. It may also include other amounts, for example from the deceased member’s accumulation interest or an amount paid under a life insurance policy held by the superannuation provider in respect of the member, if the superannuation provider has made a decision to pay these amounts out as a death benefit income stream.

Regulatory requirements of paying a death benefit income stream

A core principle is that death of the member is a compulsory cashing requirement, meaning that the deceased member’s remaining superannuation interests must be paid out by the superannuation provider as soon as practicable.

The term “cashed” or “cashing” as used within the regulatory payment standards means that the member’s superannuation interests are paid out of the superannuation system. That is, they are not rolled over, transferred or left within accumulation phase. The compulsory cashing requirement that arises on a members death specify the form in which the deceased member’s superannuation interest may be cashed, being:

• A single superannuation lump sum.
• An interim superannuation lump sum and a final superannuation lump sum; and
• One or more superannuation income streams that are in the retirement phase.

A superannuation provider will contravene the compulsory cashing requirement if it:

• Allows the deceased member’s superannuation interest to remain in the accumulation phase after a time when it became practicable to cash the deceased members superannuation interest, or
• Pays the deceased member’s superannuation interest to a dependant beneficiary as a superannuation income stream that is not in the retirement phase.

Excess transfer balance

It is possible that the transfer balance credit that arises as a result of receiving a death benefit income stream may cause there to be an excess in the transfer balance account over the transfer balance cap.

To reduce the excess transfer balance, the individual can commute the death benefit income stream or, if one exists, a superannuation income stream the individual already has in the retirement phase. If the individual chooses to commute their own superannuation income stream, the commuted amount can, if chosen, remain within the superannuation system as an accumulation phase interest.

If the individual chooses to commute the death benefit income stream, the commuted amount cannot be retained as an accumulation phase interest and the commuted amount must be paid out of the superannuation system to the individual as a death benefit superannuation lump sum.