Superannuation death benefit

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May 27 2019
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Superannuation death benefit refers to the lump sum or income stream that a super fund or self-managed super fund (SMSF) releases to a member’s beneficiary upon their death.

However, death benefits have different tax treatments depending on your relationship with the nominated beneficiary. It’s important to consider and plan for what would happen to the money in your super in the event of your death.

We cover some basic information on super death benefits to help make the rollover of benefits smoother for your intended beneficiary in the event of your death.

Who inherits superannuation?

Members have the option to nominate a beneficiary or beneficiaries or simply allow the fund to decide to whom their super balance will be paid out.

For income tax purposes, an intended beneficiary is a dependant if they satisfy certain conditions.

They must be related to the deceased member as any of the following:

former or current spouse
offspring(s) below 18 years old
financially dependent offspring below 25 years old
disabled offspring

A person may also be a dependant even if they do not fall under any of the conditions above if they have an interdependency relationship with the deceased.

Another consideration is whether you submitted a death benefit nomination to the trustee and the type of nomination that was submitted. You may make a binding or non-binding death nomination.

Binding nomination
Submitting a binding nomination means the trustee (super fund manager) and/or executor of your estate must pay out your super to whomever you nominated regardless of your relationship with them. Trustees are bound by your decision even if it believes that another person in your estate is a more fitting beneficiary.

Non-binding nomination
Submitting a non-binding nomination is similar to handing over a suggested list of beneficiaries since the fund may choose to deny the deceased person’s wishes. Trustees have the discretion whether to pay out the deceased member’s super to their nominated beneficiary or give it to another person who may be a more suitable beneficiary according to super laws or, if the fund is an SMSF, the trust deed.

How are superannuation death benefit payments released?

Super death benefits can be taken as a lump sum or income stream by eligible beneficiaries upon the member’s death. Should you wish for your dependant beneficiary to receive your super entitlements as an income stream, you must nominate them as a reversionary beneficiary.

However, superannuation death benefits paid to non-dependants can only be given as a lump sum.

What is a ‘reversionary death benefit’?

A reversionary death benefit is an income stream that is released to an eligible reversionary beneficiary upon the death of the original member. Reversionary beneficiaries are usually nominated at the start of a member’s pension phase and there are rules with regard to who can be nominated.

Are superannuation death benefits taxable?

Taxation on super death benefits depend on three things:

Beneficiary’s relationship to the deceased
Whether the money will be received as a lump sum or income stream
The component the benefits will come from

The table below summarises the tax treatment on death benefits from account-based super funds.

Lump Sum
	Dependant	Non-dependant
Lump sum Tax-free component	Dependants don’t pay tax on the death benefits, whether it is from the tax-free or taxable component. The benefit doesn’t need to be included as assessable income in the beneficiary’s tax return.	Non-dependants don’t pay tax on the death benefit. Regardless of the deceased and beneficiary’s ages: Whichever is lower between 17 per cent and the beneficiary’s marginal tax rate
Lump sum Taxable component		Whichever is lower between 32 per cent and the beneficiary’s marginal tax rate
Income Stream
	Dependant	Non-dependant
Tax-free component	For account-based super, dependants don’t pay tax on the death benefit. The beneficiary’s marginal tax rate with a 15 per cent tax offset if both deceased and beneficiary are at least 60 years old. Tax-free if one or both are over 60 years old.	A non-dependant is not allowed to receive super death benefits as an income stream.
Taxable component Taxed element
Untaxed element	The beneficiary’s marginal tax rate if both are under 60 years old. The beneficiary’s marginal tax rate less 10 per cent offset if one or both are at least 60 years old.

When the deceased is a member of a capped defined benefit fund, dependant beneficiaries have a different tax treatment.

	Beneficiary is at least 60 years old and deceased is at any age (and vice versa)	Beneficiary and deceased are below 60 years of age
Taxable component Taxed element	If the death benefit amount is above the defined benefit cap, 50 per cent of the amount above the cap counts towards the beneficiary’s assessable income.	The beneficiary’s marginal tax rate less 15 per cent tax offset
Taxable component Untaxed element	The beneficiary’s marginal tax rate less tax concessions they are eligible for	The beneficiary’s marginal tax rate
Tax-free and/or taxable component amount below the defined benefit cap	No tax	N/A

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

About the author

Louise is a content producer for Momentum Media’s nestegg who likes keeping up-to-date with all the ways people can work towards financial stability in 2019. She also enjoys turning complex information into easy-to-digest, practical tips to help those who want to achieve financial independence.

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