Super beneficiaries: Who gets your super, how and the tax they’ll pay

Apr 21, 2020
Don't let your superannuation funds be the missing piece of the puzzle for your loved ones when you die. Source: Getty.

When it comes to your superannuation balance, it’s easy to forget that it isn’t considered a personally-owned asset like a house or an investment, but rather held in a trust by your chosen super fund and governed by superannuation law.

One of the most important side-effects of this means that the money you’ve saved with a super fund won’t be dealt with under the terms of your will unless you’ve specified certain terms with your fund first. And that’s why it’s vital to understand superannuation beneficiary nominations and the taxes that are attached to them, so the process of receiving what may remain of your hard-earned savings doesn’t result in unnecessary cost to your loved ones.

What happens to your super when you die?

When you die, your super fund has to pay a death benefit to one or more people in your life who are classified as a superannuation dependant. Those who are eligible include spouses (legal and de facto including same sex partners, but excluding former spouses), children of any age, someone who was financially dependent on you and someone who was in an interdependency relationship with you at the time of death.

An interdependency relationship is a broad term but generally means someone who was in a close personal relationship with the deceased, where one or both provided financial, domestic or personal support of the other. Interdependents don’t have to live together but a common interdependent relationship would be, say, an adult child who cares for an elderly parent.

If you don’t want to leave your funds to a specific person, you have the option of leaving it to your estate or your personal legal representative. This would mean it is then dealt with under the terms of your will if you have one, or for those who don’t, under what is known as the laws of intestacy.

The laws of intestacy dictate what happens to the estates of people who die without a will – a situation otherwise known as intestate – and although the laws differ slightly between states and territories, generally the rules of inheritance mean your estate will be passed to your legal next of kin.

Leaving your super balance to your estate means you can specify in your will how and to whom you want your super funds to be distributed, which can include those above or others outside of the group of superannuation dependents as defined by super laws if you wish. However, up-to-date instructions have to be in your will at the time of death.

You must also inform your super fund who you wish to receive your money (your estate or a super dependent) by using one of the two nomination types: binding and non-binding. A binding nomination is a written notice to your fund that specifies who in the group of super dependents will receive your money or that you want your money distributed to your estate. However, it’s worth noting that not every fund offers a binding nomination.

A non-binding nomination, meanwhile, is a guideline or suggestion made to the trust that holds your super on who you want your money to go to. Because it’s not legally binding, your super fund is not obligated to follow your wishes if it believes there is someone more appropriate to whom the money should be paid.

How is your super balance paid out?

There are two options for payments for beneficiaries: a lump sum or an income stream. Generally, the beneficiary will receive a lump sum, however, in some cases they may be able to choose instead to receive some or all of your super savings as an income stream, which is also known as a death benefit pension.

Those eligible for this type of pension include your spouse, a child under 18, children aged 18-25 who were financially dependent on the deceased parent, or a disabled child. For children, the income stream will cease when they reach 25 unless they meet the disability requirements, with any remaining benefit being paid out as a tax-free lump sum.

If you believe you might be a beneficiary of a deceased person’s super or are the trustee of someone’s estate, you should contact the super provider as soon as possible to let them know the person has died and request for the super to be released.

Will my beneficiaries have to pay tax on my super?

Taxation when it comes to super death benefits is complicated and can vary depending on a number of factors, including whether the beneficiary is tax-dependent, whether the benefits are paid as a lump sum or an income stream, whether the super is tax-free or taxable and whether the provider has already paid tax on the taxable component, as well as the respective ages of both the deceased and the beneficiary (for income streams only)!

The make matters more complex, tax law applies a different definition of dependency to that of super law so your beneficiary may be your super dependent but not considered tax dependent on you. This means that although there are groups of people who are legally able to receive death benefits, only those who are tax dependent will get the option to receive the payment through an income stream as well as pay a lower rate of tax on the funds.

Tax dependents include a spouse (current or former of any sex), the deceased’s child (the child must be aged under 18), someone who was financially dependent on the deceased at the time of death and someone who was in an interdependency relationship with the deceased at the time of death.

Therefore, by process of elimination, children above the age of 18 who receive death benefits from their deceased parents will have to pay some tax on the money. However, elder law expert Brian Herd says that how much is payable depends on how the super is classified.

“The ‘taxable component’ of any death benefit your children receive depends on what parts are classified as taxed or untaxed elements,” he explained. “Generally, the tax can swing between 15 per cent or 30 per cent. Where the estate receives the death benefit, it is the estate which will have to pay the appropriate tax, which is then deducted from a beneficiary’s share of the death benefit.”

In a nutshell, if you are a dependent of the deceased and receive the super as a lump sum, you won’t need to pay tax on the taxable component. If you are not a dependant of the deceased, then the super will only be paid to you as a lump sum and the taxable component will be taxed at your marginal rate but may be reduced by a tax offset.

For more information on how much tax you are likely to pay on super death benefits based on your individual situation, head to the ATO here for more information.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

Have you nominated a super beneficiary?

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