Contents
- Taxation of death benefits to dependant
- Taxation of death benefits to non dependant
- Death benefits paid to trustee of deceased estate
- Issues related to the transfer balance cap
A superannuation death benefit is a payment from a super fund to a person or to a trustee of a deceased estate after the member has died.
The tax treatment of a super death benefit is based on:
- whether the recipient of the death benefit is a death benefits dependant or non dependant of the deceased, and
- whether the amount is paid as a lump sum or an income stream
Payment timeframe
Regulation 6.21(1) of the SIS Regulations states: “Subject to subregulation (3), a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.” Subregulation (3) states “For the purposes of subregulation (1), it is sufficient if, instead of being cashed, the benefits are rolled over as soon as practicable for immediate cashing.”
The term “as soon as practicable” is not defined in SISR and can vary depending on the specific circumstances surrounding the payment of the superannuation death benefit. The timeframe considered “as soon as practicable” can be influenced by factors such as:
- The time required to determine the beneficiaries and their benefit entitlements.
- The complexity of the deceased member’s superannuation affairs.
- The necessity to obtain probate or letters of administration.
- Delays resulting from legal disputes over the member’s death benefit.
- Administrative procedures of the superannuation fund.
The ATO acknowledges that some delays are inevitable and reasonable due to the administrative process, legal requirements, and other considerations outlined above.
In most cases, the ATO expects trustees to make significant efforts to process and distribute death benefits promptly. If the delay is due to reasonable factors, like those mentioned above, and the estate or beneficiaries are kept informed, the ATO may accept the actions of the trustee.
For instance, if probate is granted or legal disputes are resolved, the payments are typically expected to be made within a reasonable time after those matters are settled to be considered “as soon as practicable”.
In previously provided ATO rulings, there are instances where payments were made months or even years after the member’s death that were still considered to have been made “as soon as practicable”. However, these were exceptional cases with circumstances such as complex legal disputes and extensive delays in estate administration.
As a general guide, it is considered that payment of the death benefit 6 to 12 months after the date of death would comply with this requirement.
Payment as a lump sum or an income stream
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.
Death benefits dependant
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.
Spouse
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.
Former Spouse
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.
Child
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:
- an adopted child, a stepchild or an ex nuptial child of the person
- a child of the person’s spouse, and
- a child of the person within the meaning of the Family Law Act 1975.
- 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.
Same sex relationships
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.
Interdependency relationship
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.
Financially dependent on the deceased
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.
Payment after deceased died in the line of duty
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.
Taxable component and tax free component
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.
Taxation of death benefits to dependant
A superannuation lump sum death benefit paid to a dependant of the deceased is tax free. This is the case whether the lump sum is paid from an element taxed or an element untaxed in the fund. It includes a superannuation income stream payment to a deceased estate from an exempt public sector superannuation scheme. If payments from an exempt public sector superannuation scheme are made under an order of the Family Court to the trustee of a deceased estate, the superannuation death benefit is income of the trustee of the deceased estate and is taken to be income to which no beneficiary is presently entitled. It means that the trustee is subject to tax on the benefit with each payment taxed to the trustee as a superannuation lump sum.
The general rules on the taxation of death benefit payments to dependants may be summarised as follows:
| Death benefits payments to dependants | |||
|---|---|---|---|
| Age of deceased | Type of death benefit | Age of recipient | Tax treatment |
| Any age | Lump sum | Any age | Tax free |
| Aged 60 and over | Income stream | Any age | Element taxed in the fund is generally tax free. Element untaxed in the fund is generally taxed at marginal rates with offset of 10% of the element untaxed in the fund. |
| Below age 60 | Income stream | Above age 60 | Element taxed in the fund is tax free. Element untaxed in the fund is taxed at marginal rates with offset of 10% of the element untaxed in the fund. |
| Below age 60 | Income stream | Below age 60 | Element taxed in the fund is taxed at marginal rates with offset equal to 15% of the amount. Element untaxed in the fund is taxed at marginal rates. |
*Note that a Medicare levy (2% of taxable income) is added where applicable.
Taxation of death benefits to non dependant
A superannuation death benefit can only be paid to a non dependant as a lump sum. A person who is not a dependant of the deceased cannot receive a superannuation income stream death benefit.
For 2023-24, a superannuation death benefit paid to a non dependant is taxed as follows.
- No tax is payable on the tax free component
- Tax on the taxable component would generally be payable at the rate of 15% plus 2% Medicare levy. The taxable component is included in assessable income, with a tax offset to ensure that the rate of income tax on the element taxed in the fund does not exceed 15%, and the rate of income tax on the element untaxed in the fund does not exceed 30%.
For a death benefit paid to a non dependant not being liable to tax, a member may be able to convert a taxable component of their superannuation to a tax free component. This could be done by withdrawing an amount which contains a taxable component from the member’s superannuation account and recontributing it as a non concessional contribution which would be classified as a tax free component.
The following table summarises the tax treatment of death benefit payments to non dependants.
| Death benefit payments to non dependants | |||
|---|---|---|---|
| Age of deceased | Type of death benefit | Age of recipient | Tax treatment |
| Any age | Lump sum | Any age | Element taxed in the fund taxed up to a maximum rate of 15%. Element untaxed in the fund taxed up to a maximum rate of 30%. |
| Any age | Income stream | Any age | Cannot be paid as an income stream. Income streams that commenced before 1 July 2007 are taxed as if received by a dependant. |
*Note that a Medicare levy (2% of taxable income) is added where applicable.
Death benefits paid to trustee of deceased estate
Where a superannuation death benefit is paid to the trustee of a deceased estate rather than directly to a dependant or non dependant beneficiary:
- the benefit is treated as if it were paid to a death benefits dependant of the deceased to the extent that one or more beneficiaries of the estate who were death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit, and
- the benefit is treated as if it were paid to a non dependant of the deceased to the extent that one or more beneficiaries of the estate who were not death benefits dependants of the deceased have benefited, or may be expected to benefit, from the superannuation death benefit.
In either case, the benefit is taken to be income to which no beneficiary is presently entitled, and the trustee is liable to pay tax on the benefit on behalf of the beneficiary at the appropriate rate. A superannuation proceeds trust may be established solely to receive superannuation proceeds on the death of a fund member. The trust can be established by a will or by a deed after the death of an individual.
If an ultimate beneficiary of a deceased estate is a death benefits dependant of the deceased, no tax will be payable on the benefit.
If an ultimate beneficiary is a non dependant of the deceased, the trustee will pay tax at the rates as mentioned previously. The trustee is required to withhold the appropriate amount of tax from the benefit and remit it to the ATO.
If the ultimate beneficiaries include both dependants and non dependants, the apportionment of the benefit will depend on the type of trust. If it is a fixed trust, calculating the portion for each beneficiary should not be difficult. If it is a discretionary trust, the beneficiaries can only be ascertained after the trustee has decided about the allocation.
Issues related to the transfer balance cap
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.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.