Estate planning: Beware the dastardly death tax

Although superannuation death benefits are tax-free when paid to individuals considered ‘dependants under the tax laws, a ‘death tax’ continues to apply when super monies are paid to individuals considered ‘non-dependants under the tax laws’.

Any of your children aged 18 or over, who can’t prove they were dependent on you financially before you died, or can’t prove they had an interdependent relationship with you before you died, are deemed not to be a ‘dependant under the tax laws’, even though they are a ‘dependant under the super laws’. What this means is that they can still receive a death benefit from your super fund or estate, but the benefit is likely to be taxed, depending on the components of the super benefit.

Dependant definition: A ‘dependant under the tax rules’ (which means tax-free superannuation death benefits) automatically includes a fund member’s spouse (including same sex spouse since 1 July 2008) and the fund member’s children who are aged under 18. An adult child, or anyone else for that matter, can be deemed to be a dependant under the tax rules if he or she can prove:

  • he or she was financially dependent on the deceased fund member, or
  • he or she had an ‘interdependent relationship’ with the deceased. An interdependent relationship is a close personal relationship between two people who live together, where one or both provides for the financial and domestic support, and care of the other.

Note: A financially independent adult child is considered a dependant under the super laws, but treated as a non-dependant under the tax laws. What this means is that your child can receive superannuation death benefits, but is likely to pay tax on those super benefits. Non-dependants under both superannuation laws and tax laws can also receive a superannuation death benefit, but usually only after a super fund pays a benefit to a person’s estate.

How much death tax is payable?

The level of tax payable on lump sums paid to ‘non-dependants under the tax laws’ depends on the components that make up the death benefit. A death benefit can be made up of:

  • a taxable component and
  • a tax-free component, or
  • just one of these components.

In taxed schemes (90% of fund members belong to such schemes), the deceased’s tax-free component is always tax-free, but the taxable component will be subject to 15% tax plus Medicare levy when paid to a non-dependant under the tax laws.

In untaxed schemes (many long-term public sector fund members), the deceased’s tax-free component is tax-free, but 30% tax (plus Medicare Levy) will be payable on the death benefit with an untaxed element taxable component.

Note: Lump sum benefits paid to ‘dependants under the superannuation laws’ are tax-free when paid from taxed schemes or untaxed schemes. Lump sum benefits paid to non-dependants via the deceased’s estate are subject to the ‘death tax’ but are not subject to the Medicare levy.

I explain the rules applying to death benefits, and strategies to minimise the ‘death tax’ in more detail in my book DIY Super For Dummies (Wiley).

© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

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Comments

  1. Danny Beger says:

    Whilst it may seem obvious, from an estate planning lawyer’s perspective, I think it is worth saying that a legitimate estate planning mechanism for those of retirement age with no dependants who have been diagnosed with a terminal illness is to withdraw all superannuation benefits and either give it away or leave it as part of their estate to be distributed in accordance with the terms of the will. In this way tax on death benefits to non dependants can be avoided as there will be no benefit. There is no tax payable on gifts or on the distribution of monetary assets from an estate.

  2. Would you please enlighten me as to what is the death benefit tax situation for an independent and disabled adult child ?

  3. You say:
    In taxed schemes (90% of fund members belong to such schemes), the deceased’s tax-free component is tax-free, but the taxable component will be subject to 15% tax plus Medicare levy when paid to a non-dependant.

    But then two paragraphs later you say:
    Note: Lump sum benefits paid to dependants are tax-free when paid from taxed schemes or untaxed schemes. Lump sum benefits paid to non-dependants via the deceased’s estate are subject to the ‘death tax’ but are not subject to the Medicare levy.

    Is Medicare payable or not?

    Thanks

  4. Trevor Hastie says:

    Find your website info very interesting, but probably need to go further ‘one on one’ to clarify my individual situation.

    Thanks
    Trevor

  5. Trevor Hastie says:

    I am still a subscriber to your newsletter as far as I know, however re Estate Planning, do you or would you reccommend someone in Brisbane – preferably on the Southside.

    Thanks

    Trevor

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