What happens to your super when you die
In most cases, when a person dies, their super fund will pay their remaining super to the person they have chosen as their nominated beneficiary. Super paid after a person's death is called a super death benefit.
The tax on a super death benefit depends on:
- whether the person receiving the benefit is a dependent or non-dependent of the deceased person
- whether the benefit is paid as a lump sum or super income stream
- whether the super is taxable or tax-free, and whether the super fund has already paid tax on the taxable component
- the age of the person receiving the benefit
- the age of the deceased person when they died.
As a general rule, death benefits paid to dependents are tax-free though the table below illustrates in detail how death benefits are applied when paid to a dependent of the deceased:
The table below illustrates how death benefits are applied when paid to a non-dependent of the deceased.
As a general rule, tax is payable at a higher rate when paid to a non-dependent.
Who is a tax dependent?
A dependent of the deceased includes:
- a surviving spouse or de facto spouse
- a former spouse or de facto spouse
- a child of the deceased who is under age 18
- any other person who was financially dependent on the deceased
- any person who had an interdependency relationship with the deceased
All other recipients would be non-dependents.
So, super paid out of the deceased estate to brothers, sisters, parents or adult children would normally be taxed at non-dependent rates unless there was some form of financial dependency between the deceased and the recipient (for example, the recipient was handicapped and financially supported by the deceased).
The lump sum tax offset and non-dependents
Where a lump sum death benefit is paid to a non-tax dependant, the taxable component (both taxed and untaxed elements) forms part of the taxpayer's assessable income.
However, a lump sum tax offset is available to ensure the tax payable does not exceed the maximum tax rates.
Whether the lump sum is paid directly or via the deceased estate:
- if the taxpayer's marginal tax rate exceeds the specified tax rate, a lump sum tax offset is available to ensure that the taxpayer does not pay more than 15% tax on the taxable taxed element and 30% on the taxable untaxed element; or
- if the taxpayer's marginal tax rate is lower than the specified maximum tax rate, the taxable component of the lump sum death benefit is subject to the marginal tax rate.
Payments direct from the super fund v payments via the deceased estate
Where the payment is made directly to the beneficiary by the super fund, the super fund must withhold tax on the taxable component of the lump sum at a rate of either 17% (taxed elements) or 32% (untaxed elements) - this includes the 2% Medicare levy.
The inclusion of these amounts in the individual beneficiary's tax return means the beneficiary will have higher assessable income in the financial year that the lump sum death benefit is received, which can have flow-on effects such as:
- the Medicare Levy surcharge can apply where the beneficiary does not have an appropriate level of private hospital insurance;
- the reduction or elimination of the low-income tax offset, low income and middle income tax offset and seniors and pensioners tax offset;
- impact on Government co-contribution and spouse contribution tax offset;
- reduction or elimination of Family Tax Benefit payments; and
- increase in child care cost due to the potential reduction in Child Care Subsidy.
However, where the super fund pays the amount to the deceased estate (which then pays it on to the beneficiary according to the Will), very different tax consequences apply.
First of all, it is not subject to PAYG withholding tax, therefore the payment to the deceased estate by the super fund is made gross. The estate (in the form of the deceased's legal personal representative, ie the executor of the Will) then needs to account for the tax when it is paid to a non-dependant.
The executor must include the taxable taxed and untaxed elements in the deceased estate's trust return as assessable income. The same maximum tax rates apply, however, the Medicare Levy is not payable when the death benefit is paid from the deceased estate to a non-tax dependant.
The executor or the administrator must deduct tax at the appropriate rate (15% or 30%) from the taxable component of the lump sum before paying the death benefit onwards to a non-tax dependant beneficiary.
The beneficiary does not need to declare this income in their tax return, meaning that there is no increase in their assessable income (or any of the undesirable tax and benefits side-effects where the beneficiary receives the amount direct from the super fund, highlighted above).
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