Death Benefits from Superannuation
If you were to die, the money you have in super may not necessarily be distributed to your intended beneficiaries.
Superannuation is not an estate asset and upon death of the member does not automatically flow to the estate of the deceased. However, superannuation funds will allow you to nominate a beneficiary for your super.
A death benefit nomination is a legally binding nomination that allows you to advise the trustee who you wish your super benefits to be paid to upon your death. Under the Superannuation Industry (Supervision) Act 1993 (“SIS Act”), the beneficiaries that you can nominate to receive your super death benefit include:
- Your legal personal representative (the executor or administrator of your estate), if you want your super to be dealt with via your Will;
- Your spouse, including de-facto of the same or opposite sex;
- Your children (including step children);
- A person in an interdependency relationship with you; or
- A financial dependant
Depending on your super fund and the options available, the Trustee may consider your nomination when they exercise discretion in paying a superannuation death benefit but are not bound by your nomination (this is known as a ‘non-binding’ death benefit nomination). Alternatively, the Trustee may be bound to pay a superannuation death benefit in accordance with your specific nomination (known as a ‘binding’ death benefit nomination).
When making your beneficiary nomination you should also consider the tax consequences, which are based on who the super death benefit is paid to and whether they are considered a dependant for ‘tax purposes’.
Nominating a Beneficiary
If you have nominated a beneficiary this should be shown on your super statement. It should also state whether the nomination is binding or not.
If you are not sure, you can contact your super fund to find out who has been nominated.
Making a binding nomination generally binds the trustee of your super fund to pay the benefit to the beneficiaries you nominate. For a binding death benefit nomination to be valid you are required to have the nomination witnessed, and reconfirm the nomination every three years. Some funds now offer a non-lapsing ‘binding’ nomination, where the three year requirement does not apply. This depends on the rules of the super fund.
In the event of your death, the nominated beneficiary(ies) will receive your super benefits, including the proceeds of any insurance benefits.
There may be tax payable on a super death benefit, depending on the circumstances of the beneficiary at that time.
Tax Treatment of a Beneficiary
If the beneficiary is a dependant for tax purposes the benefit received is entirely tax free. A dependant for tax purposes is defined in the Income Tax Assessment Act 1997 (ITAA 97) to include:
- Your spouse, including de-facto of the same or opposite sex
- Your children (including step children), if under age 18 or age 18-25 and in full-time study;
- A person in an interdependency relationship with you; or
- A financial dependant
If the beneficiary is a non-dependant for tax purposes (for example an adult child over age 18) then any tax free component is tax free, but the taxable component is taxed at 15% plus Medicare Levy, and any untaxed element is taxed at 30% plus Medicare Levy.
An untaxed element could arise with payments made from an untaxed superannuation fund (e.g. public sector super fund) or the proceeds of an insurance policy paid via the super fund.
Another option, if offered by your fund, may be for a surviving dependant to draw an income stream from the super fund. This may be a more tax effective option, however a more restrictive definition of dependant usually applies in this case.
Next Steps
As you can see there are a number of important considerations in regard to your estate planning. Your superannuation can form an important and substantial part of your estate.
It is a highly complex area and we recommend that you discuss estate planning consequences applicable to your situation with an adviser and/or solicitor before making any decisions.
