The table below sets out the taxation consequences of an income stream payment to either a dependant or non-dependant of the deceased.
| Death Benefit Income Stream | ||
|---|---|---|
| Component | Tax payable | |
| Either the beneficiary OR deceased is over 60 years old | Taxable (taxed) | 0% |
| Taxable (untaxed) | MTR (1) less 10% tax offset* | |
| Tax Free | 0% | |
| (1) Marginal tax rate *Plus Medicare levy | ||
| Beneficiary AND deceased are both under 60 years old | Taxable (taxed) | MTR (1) less 15% tax offset* |
| Taxable (untaxed) | MTR | |
| Tax Free | 0% | |
| (1) Marginal tax rate *Plus Medicare levy |
Where an eligible child has been in receipt of an income stream under a Superannuation Death Benefits Payment, they are required to commute this stream on or before turning 25 years of age into a lump sum payment. This lump sum payment will be paid out to them tax free.
From 1 July 2012, Reg. 995-1.01 ITAR1997 provides for a pension’s pre-existing tax exemption to continue post death until it is practicable to distribute the deceased’s benefits in the fund. Prior to this date, pensions were deemed to have ceased on death and any subsequent income or capital gains deemed as taxable.
If an income stream is commuted into a lump sum within six months from the date of death or three months from the grant of Probate, the commutation will continue to be treated as a death benefit payment. Any payment paid post this period will be treated as a normal Superannuation proceeds lump sum payment, and tax accordingly.
A similar exemption applies if there has been a legitimate delay in making payment as a direct result of legal action or difficulties in contacting or identifying beneficiaries.
Definition of dependant
As noted in part one, the definition of dependant for Tax Law purposes differs from the definition of dependant for Superannuation purposes. The Superannuation legislation essentially determines who can receive a benefit, whilst the tax legislation determines how that benefit will be taxed.
| Super & Death Tax Benefits Dependaent | Super | Tax |
|---|---|---|
| Spouse (including de facto & same sex) | Yes | Yes |
| Former spouse | No | Yes |
| Child under 18 (including ex-nuptial, adopted & stepchild) | Yes | Yes |
| Child over 18 (financially independent) | Yes | No |
| Financial dependant at time of death* | Yes | Yes |
| In interdependant relationship with deceased** | Yes | Yes |
*The term “financial dependant” is not specifically defined in either the superannuation or tax legislation, so from a taxation perspective, it is necessary to turn to the ATO’s interpretive decisions, case law and Administrative Appeal Tribunal decisions. These provide a mixed view of the definition of “living” to which the suggested dependent has been accustomed.
** The “Interdependent relationship” definition is identical for both Superannuation and Income Tax law purposes and could include grandchildren who live with grandparents and parents caring for a disabled child.
Two people have an interdepdency relationship if:
- they have a close personal relationship
- they live together
- one or each of them provides the other with financial support; and
- one or each of them provides the other with domestic support and personal care
Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.
This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning. Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.