Superannuation death benefits Q&A

When advising clients or drafting a Will, do you ensure that you take account of superannuation benefits that may be payable on the death of your client and in particular the tax consequences arising when those benefits are paid to particular individuals?

Current at 1 November 2021

Superannuation death benefits Q&A

When advising clients or drafting a Will, do you ensure that you take account of superannuation benefits that may be payable on the death of your client and in particular the tax consequences arising when those benefits are paid to particular individuals?

Current at 1 November 2021

When reviewing client affairs, it is important to take a holistic approach and consider all client assets to see if certain classes of assets are better suited to particular beneficiaries.

 

This article answers some common questions on Superannuation Death Benefits (SDB’s).

What is an SDB?

An SDB is any superannuation benefit that is paid after the death of a member.

What is a ‘Binding Death Benefit Nomination’ (BDBN)?

A BDBN is a notice which a member provides to the trustee of their super fund outlining who they would like their superannuation paid to in the event of their death.

Why is it important to make a BDBN?

Where a member has left no BDBN, the trustee of the super fund has the sole discretion to determine to whom the deceased member’s superannuation benefits are paid. The trustee can however only make a payment to a non-financial dependant after they have made reasonable enquiries to locate financial dependants or the deceased’s Legal Personal Representative (LPR). This can lead to significant delays in the payment of benefits and in winding up the estate.

Does it make a difference if a lump sum SDB is paid to a dependant or non-dependant of the deceased?

Yes. A lump sum payment made directly to a dependant will generally be tax-free. A lump sum payment made directly to a non-dependant will be taxed according to the components that make up the lump sum.

Is there a tax difference if the death benefit is paid to the deceased’s LPR or directly to the beneficiaries if the beneficiaries are the same for both the estate and the death benefits?

There is no noticeable tax difference when a death benefit is paid directly to the dependants of the deceased or to the LPR where the beneficiaries are also classified as tax dependants.

When the death benefits are paid directly to a non-dependant by the fund, the difference will be the Medicare Levy – ie the taxed element of a taxable component will be taxed at a maximum of 15% plus Medicare Levy while the untaxed element of a taxable component will be taxed at a maximum of 30% plus Medicare Levy. The income will need to be included in their personal income tax returns.

Payment to the LPR is addressed in the following paragraph.

What if the SDB payment is made directly to the deceased’s LPR ie the executor of the estate?

The benefit will be taxed in the hands of the executor at the rate that would apply had it been paid directly to the ultimate beneficiary, ie a dependant or non-dependant beneficiary. The beneficiary would not be required to report this income in their personal income tax return as the executor will have already declared and paid tax on the payment.

Note that an SDB paid to the LPR would not attract the Medicare Levy and the tax would be paid by the LPR at either 15% or 30%.

How about income stream SDB’s?

Where the deceased was aged 60 or above at the time of death, or the recipient of the income stream is aged 60 or above, then the taxed element of the taxable component will be tax-free. However, the untaxed element of the taxable component will be taxed at the dependant’s marginal tax rate and will receive a 10% tax offset.

Where the deceased was under 60 at the time of their death and the dependant is also below the age of 60 then the taxed element of the taxable component will be taxed at the dependant’s marginal tax rate and will receive a 15% tax offset. The untaxed element of the taxable component will be taxed at the marginal tax rate with no tax offset available.

Effective 1 July 2007, superannuation income streams cannot be paid to non-dependants.

Should the transfer balance cap be considered on payment of death benefit income stream?

Yes. If the dependant is already a recipient of a super income stream, the dependant will need to ensure they don’t exceed the transfer balance cap when measuring the value of their own pension and any death benefit pension.

If the cap is exceeded, the death benefit can be paid out as lump sum or the non-death super income stream can be transferred back to the accumulation phase to bring the transfer balance cap under the limit – ie $1.6M in the 2017-2018 year.

What if there are children under 18?

It may be suitable to establish a superannuation proceeds trust via your Will. The trust income would be taxed at ordinary adult rates rather than penalty rates imposed on children.

What should be considered from a tax perspective when making a decision regarding an SDB?

It may be prudent to ensure that SDBs are paid to a dependant (directly or indirectly) and make provision for non-dependant beneficiaries (such as adult children) out of non- superannuation assets.

Plan ahead and seek advice when needed.

 

 

 

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.