You work hard to save for yourself and your loved ones and your superannuation savings are no exception. So how can you make sure your hard-earned super funds go to the loved ones you want them to?
If your family relies on you financially, it can be stressful to think about how your children and family would survive if you were to pass away. This is why a superannuation death benefit is so important so that you can have more peace of mind that your hard-earned super fund savings will provide for and protect your loved ones.
The protection of your family is paramount should the worst come to pass, and a nomination of a beneficiary can provide considerable peace of mind. Knowing the funds will be instructed to be paid as you designate is crucial in planning your estate.
How do your beneficiaries gain access to those funds? Who is a dependant? How does the tax apply? What is a non-binding nomination or a binding death benefit nomination?
This article covers these questions (and more) to make the process smooth and ensure your nominated individuals may receive your superannuation fund benefits.
Jump straight to…
- You work hard to save for yourself and your loved ones and your superannuation savings are no exception. So how can you make sure your hard-earned super funds go to the loved ones you want them to?
- How to Claim Superannuation Death Benefits
- Death Benefit Payments to Foreign Residents
- Income Stream Death Benefits
- Lump-Sum Death Benefits
- Commutation Lump-Sum Death Benefits
- Anti-Detriment Payment (Tax Saving Amount)
- Overcoming the Complexities of a Super Beneficiary Death Benefit
How to Claim Superannuation Death Benefits
If a superannuation fund member has died, the fund may pay the beneficiary the total fund balance upon the member’s death.
Any additional benefits from other services or products that might have been in place with the superannuation may also be paid (including a life cover component).
Should the deceased have more than one fund in place, the beneficiary must contact every fund, and each account must be known to the beneficiary.
The account holder should have nominated beneficiaries for each fund and provided the account information to each.
Beneficiaries will not receive the fund benefit through a will of the deceased estate, as the fund is owned and managed by a trustee (the company which holds the fund).
Trustees are tasked with distributing the member’s superannuation in accordance with their estate plan. Due to this, the structure and beneficiaries of a will might be different from the superannuation beneficiaries.
When making a superannuation death claim, the beneficiary should notify the relevant fund of the member’s death.
Each super fund can vary in its claims process. However, the fund will generally inform the beneficiary of the steps and documents to make a successful claim for the death benefit payment.
After the beneficiary fills out the necessary forms, the super fund will evaluate the application and the beneficiaries’ relationships with the deceased member.
If the application is successful, the death benefit is paid.
Dependants are individuals who rely on another as a primary income source or to receive payment from a deceased member’s death benefit.
However, dependants are defined differently under the Superannuation Law and Taxation Law.
Who Is a Dependant Under Superannuation Law?
Under the Superannuation Industry (Supervision) Act of 1993 (ISI), death benefits will generally be paid to a legal personal representative like the estate or one or more dependants.
A superannuation dependant includes:
- The spouse of the member
- A member’s child
- Someone with whom the member had an interdependence relationship
Interdependency is defined as someone with whom there was a close personal relationship with someone, they lived together, and one or each provides domestic support and personal care.
Another form of dependant is a financial dependant that is neither a spouse nor child. This situation can occur if two individuals are in a close relationship, such as in an interdependency, and one or each of them provides financial support to the other party.
Who Is a Dependant Under Taxation Law?
A dependant under income tax law is defined differently than one under Superannuation Law. Taxation is applied more favourably to dependants than non-dependants.
A tax dependant includes:
- An individual’s former spouse
- An individual’s spouse
- The child of the individual under the age of 18
- A person with whom the individual had an interdependence relationship
- A traditional dependant (someone dependent on the member for financial assistance)
- Non-tax dependants may be treated as tax dependants if the member has died in the line of duty, performing as either a police officer or a defence force member.
The main differences between dependant classification under tax law and Superannuation Law are that a former spouse may be a tax dependant, and an adult child is not recognised as a dependant.
However, the adult child would qualify in the case of being a traditional dependant (only ages 18 to 25) or being part of an interdependence relationship.
In the case of the former spouse, while the tax benefit applies, the receipt of the superannuation benefit would have to come through a traditional dependency, interdependent relationship, or an estate.
Death Benefit Payments to Foreign Residents
In some cases, super death benefit recipients may be foreign residents for Australian tax purposes.
Those cases specify that the foreign resident receives the same tax treatment as a resident, as the income is considered Australian-sourced income. Generally, they are exempt from the Medicare levy.
The beneficiary might be a tax resident of a country with a double tax agreement with Australia. There may be no Australian tax imposed on the benefit in such cases.
Should you need to check if a tax treaty exists between Australia and another nation, the Australian Treasury provides a complete list of tax treaties online.
Examples of Australian tax treaties include income tax treaties, tax information exchange agreements, East Timor agreements, and Foreign Account Tax Compliance Act (FATCA) intergovernmental agreements.
Income tax treaties are bilateral agreements to resolve double taxation issues on the income tax of the countries’ respective citizens. These treaties determine the tax amount the government can impose on a taxpayer’s income, capital, or estate.
Tax information exchange agreements are contracts between Australia and another country agreeing to exchange civil and criminal tax matters upon government request.
FATCA is a U.S. federal law requiring non-U.S. foreign financial institutions (FFIs) to examine their records for individuals that may have indications of U.S. connections.
This law requires such individuals to report their non-U.S. financial assets to the U.S. Internal Revenue Service (IRS).
A foreign resident’s tax information involving any of these treaties can be used as a reference when making death benefit claims or receiving payments.
Income Stream Death Benefits
A superannuation death benefit may be paid out as an income stream. Income stream death benefits are paid out on a regular basis to the nominated beneficiary.
If the death benefit is paid as an income stream, the proportioning rule must be used to calculate the tax-free and taxable components.
The proportion used to calculate applies to all benefits paid from the death benefit income stream.
If the death benefit income stream is being paid to a dependant child of the deceased super fund member, the death benefit income stream must be paid before the date the child turns 25 years old. If the death benefit income stream hasn’t been fully paid out by this age, the remaining benefit must be paid as a tax free lump sum. These are the taxation laws in all cases except if the child beneficiary has a permanent disability.
Lump-Sum Death Benefits
A super death benefit payment may also be paid out as a lump sum. This is the most common way a death benefit is paid.
A lump sum death benefit is always paid to non-tax dependent payees and typically to tax dependent payees of the deceased member.
From a tax treatment analysis, in most cases, it is advantageous to take a lump sum death benefit payment over an income stream payment unless the beneficiary is over the age of 60 or all components of the benefit have been taxable.
You may consider claiming tax deductions for insurance premiums to help provide for the fund members’ future death benefits. However, the tax and untaxed elements have different calculations.
Commutation Lump-Sum Death Benefits
A commutation lump sum benefit is when the deceased received the super as an income stream at the time that they died, and the income stream is commuted to pay out as a lump sum to the beneficiary.
In such instances, the lump sum is proportioned as it was as an income stream, meaning that the proportions of the lump sum payment are strictly proportionate to how they were for the income stream.
- A member receiving an account-based income stream died on 1 December 2018 at 66 years old. Their income stream comprises 30% tax-free and 70% taxable proportions.Suppose the member’s account balance upon death was $200,000 and paid as a lump sum to the spouse on 11 March 2019. Because the payment came from the same super interest as the deceased member’s income stream, the taxable and tax-free proportions of the benefit are the same. Thus, if the tax-free component and taxable components of the income stream were 30% tax-free and 70% taxable, they would be the same at the point of the lump sum payout. In this case, the taxable and tax-free components of the lump sum are as follows:
- Tax-free component: $200,000 x 30% = $60,000
- Taxable component: $200,000 x 70% = $140,000. If the deceased member’s spouse is a dependant, the total benefit is tax-free. However, if the spouse was a non-dependant, the fund will assess the taxable portion for the deduction.
Anti-Detriment Payment (Tax Saving Amount)
An anti-detriment payment is an additional amount that may be paid to a dependant in addition to their original lump sum death benefit.
The extra payment represents a refund of the tax contributions of 15% previously paid by the member throughout their lifetime payments.
The fund’s rules determine these payments, and there is no legal requirement for the fund to make such a payment. This payment is only payable if the death benefit is given as a lump sum to the deceased member’s qualified dependant, such as a spouse, a former spouse, a child, or the deceased estate’s trustee.
If the fund pays an anti-detriment payment, the trustee can make a tax deduction claim within the financial year of the lump sum payment.
When a spouse, former spouse, or dependent child receives the death benefit, the entire amount and the anti-detriment payment are tax-free.
However, the anti-detriment payment becomes taxable if the fund pays the death benefit to a non-dependent child.
If a qualified dependant receives only a part of the death benefit or lump sum, a pro-rata tax deduction is available.
Meanwhile, if the lump sum is paid to the deceased member’s estate, the deduction amount depends on how much benefit the dependant is expected to receive from the estate.
- For instance, the deceased member’s spouse receives 70% of the death benefit while the member’s brother receives 30%. The pro-rata deduction should be 70% of the calculated amount when claiming a tax deduction for the anti-detriment payment. An anti-detriment payment is included as part of the death benefit if the member died on or before 30 June 2017, and this payment must be paid before 30 June 2019.
The government has since removed this provision to consistently treat the lump sum death benefits as they apply to all super funds.
Specifics With Dependency and Taxation
How taxation applies and the definition of dependency can be two confusing subjects if a potential beneficiary receives the benefits of a super fund. There are some nuances to cover that will make this process understandable.
The Nuances of Being a Dependant
Some applicants will have to be determined to qualify as dependants under certain conditions. The status of a child as a tax or non-tax dependant of the deceased has a few nuances based on:
- disability; and
- living situation
A child under 18 is always considered a dependant under tax law.
In contrast, the ages 18 to 25 can be regarded as a financial dependant in a case where the parent is providing financial support, such as when the child might be a university student.
The law would define a dependant in this age group as an adult child of the deceased member that could not afford a basic standard of living without financial support from the parent.
No age limit applies to a disabled child. Also, while the term ‘step-child’ is not defined, ‘child’ can be construed to include step-child and ‘ex-nuptial child’ in its definition.
A child over the age of 25 that is not disabled may be qualified as a dependant based on an interdependent relationship. The concept of interdependency is intended to take the qualification beyond that of a domestic partner to any relationship where either the beneficiary or the deceased:
- Provided full financial support (one might be a financial dependant), or both have provided financial support for the other depending on the financial situation
- Lived together in the same household
- Provided domestic support and personal care
- Have a close personal relationship
- If they do not satisfy the prior conditions but either or both suffer from a physical, intellectual, or psychiatric disability.
If the requirements for dependency are met:
- Filing a claim involves notification to the fund and furnishing of a death certificate.
- Request details about the nominated beneficiaries and the fund balances and inquire if other amounts are payable.
- Apply for the benefit payment by filling out any necessary forms.
- The fund then assesses the application of the relationships between the beneficiaries and the deceased.
- The outcome of the assessment is provided.
- Requests to appeal are made if needed.
- A final decision may be appealed to the Superannuation Complaints Tribunal within 28 days.
- The death benefit is paid by the super fund.
How Tax Applies
According to the Australian Taxation Office (ATO), super may include taxable and non-taxable benefits depending on if the benefit is paid from an untaxed or taxed scheme.
Additionally, tax treatment and implications may change depending on:
- how the contribution of the super fund is made
- the age of the deceased
- the age of the beneficiary; and
- whether a life insurance policy (or multiple insurance policies) are included in the fund.
A tax dependant, as defined above, will have reduced (or zero) tax on super components. In contrast, a non-tax dependant is taxed on the taxable elements of the super.
A straightforward breakdown for a lump sum payment by a taxable dependant, taxable (or non-taxable), element tax treatment, and the tax component would be:
|Tax rates when paid as a lump sum|
|Tax component||Tax dependent payee||Non-tax dependent payee|
|Taxable (element taxed)||0%||Up to 15%|
|Taxable (element untaxed)||0%||Up to 30%|
Only a tax-dependent beneficiary may receive the super paid as a pension. These beneficiaries are limited to:
- a spouse
- a child under 18
- a dependent child aged 18 to 25, and
- a disabled child.
The tax is then based on the age of the deceased or/and the beneficiary. The rates are:
|Tax rates on the super when paid as a pension to a tax dependant|
|Tax component||The deceased person (based on the date of death) or beneficiary is age 60 or older.||Both the deceased person (at the time of their death) and the beneficiary are under the age of 60|
|Taxable (element taxed)||0%||Marginal rate less 15% offset|
|Taxable (element untaxed)||Marginal rate less 10% offset||Marginal rate|
Overcoming the Complexities of a Super Beneficiary Death Benefit
The rules for death benefits can be overwhelming at times. First, it is determined who qualifies as a beneficiary and then how the tax treatment is applied to them.
Planning ahead for how a death benefit is handled and a benefit paid is essential for the fund member as much as post planning is for the beneficiary.
Pre-planning with financial advisers who work with reputable financial services companies can save you time, stress, and money in the unfortunate instance that you need to file to receive the benefit.
If your personal goals require a regular income source, advisers may suggest a plan that provides an income stream rather than a lump sum payment.
Financial advisers will provide you with quotations and relevant product disclosure statements (PDS) for your chosen product.
Sound financial advice is essential in cases where someone is in a position to claim a death benefit.
To ensure that you get the best financial advice, consult with financial advisers or insurance providers legitimately operating with an Australian business number (ABN) and Australian financial services licence (AFSL).
For more questions regarding superannuation death benefits, you can get in touch with our Expert Insurance Partners.
- Super Death Benefits
- Australian Tax Treaties
- Foreign Account Tax Compliance Act (FATCA)
- Paying Superannuation Death Benefits
- How Tax Applies to Your Super