The different types of dependents and its tax implications in superannuation

Building on our previous discussion of how superannuation proceeds are taxed, it’s crucial to understand who qualifies as a dependent under various regulations. This article will explain the definitions and implications of different dependent types, which can significantly influence how benefits are taxed and distributed.

In the world of superannuation, there are two types of dependents.

Under one piece of legislation, the Superannuation Industry Standards Act, the list includes spouses, children and anyone who is financially dependent or interdependent.

Under the Tax Act, dependents include spouses and financially dependent kids and individuals that are financial dependents or interdependent of the deceased.

A financially dependent child is likely to be one who is aged under 18 or perhaps a child who is living at home due to a disability.

It might seem a subtle difference, but the tax implications between financial dependents and others are significant.

If the named beneficiary is a tax-dependent, the entire benefit passes over tax free. They could elect to take the money as an income stream or as a lump sum.

Because in many cases, the only financial dependent might be the partner of the deceased, financial planners will be quick to update the surviving partner’s beneficiary nomination paperwork when there are no further financial or tax dependents in line.

If the named beneficiary is not a tax-dependent, then it becomes more complicated because part of the payment becomes taxable income.

Super death benefit payouts generally include two components.

A tax-free part usually represents the non-concessional contributions paid in over the years which extends to super down-sizer contributions. Next, there is a taxable component made up of the concessional contributions plus the earnings of the fund.

Concessional contributions include will compulsory super, salary-sacrificed super and personal concessional contributions.

The taxable part of the distribution to a non tax-dependent beneficiary is added to the beneficiary’s other income for the year.

It gets complicated, but the ATO will apply offsets or credits to ensure that the beneficiary only pays 15 per cent tax on the taxed component. They will still be up for the 2 per cent Medicare levy or even more, if they don’t have adequate private health insurance.

The bigger problem is that the total taxable income figure, before the credits are applied, is used to determine entitlements to other tax benefits and government concessions — concessions which disappear if you earn too much in a given year.

The long list includes possible loss of family tax benefits, subsidised child care, paid parental leave and the low income and seniors tax offsets. Your beneficiaries might even have to pay an extra 15 per cent contributions tax on their own concessional contributions to super.

The fix is relatively easy.

If there are no financial or tax-dependents to benefit from your super, you might be better off leaving the super to your estate. That way, it’s distributed in your will.

The total 15 percent tax will be payable but this time, the estate effectively pays the bill and distributions from an estate are generally not regarded as taxable income. That means you don’t even declare it on your income tax return, thereby avoiding the problems.

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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.