Super death benefits and tax: What you and your beneficiaries need to know

Nobody enjoys paying more tax than necessary. Even when you die the tax office will be quick to take a cut of your super death benefit if you aren’t careful.

So, to avoid having your beneficiaries pay more tax than necessary, it’s important to become familiar with the tax rules governing super death benefits.

That way you can plan the distribution of the assets in your estate – including your super – with these rules in mind, ensuring your benefits are paid in the most tax-effective manner possible.

Receiving a super death benefit: Dependant or not?

When a super death benefit is paid out, tax payable depends on whether the recipient is categorised as a dependant or non-dependant according to the Income Tax Assessment Act 1997 (tax law).

Note the definition of dependant in tax law is different from the definition in super law that governs who can be paid a death benefit directly from a super fund.

Your dependants for tax purposes are people who are (at the date you die):

• Your spouse or de facto spouse (of any sex)
• Your former spouse or de facto spouse (of any sex)
• Your children aged under 18
• Someone with whom you had an interdependency relationship
• Someone who was financially dependent on you (known as an ‘ordinary meaning’ dependant).

Any person receiving a death benefit because the deceased died in the line of duty as a member of the defence force, Australian Federal Police or a state police force, or as a protective services officer is also a death benefit dependant under tax law.

You are in an interdependency relationship if you and the other person live together, have a close personal relationship and at least one of you provides the other with financial support, domestic support and personal care. For more details on interdependency relationships, see the ATO website here.

Defining financial dependency for tax purposes

The ATO can take a much stricter approach to defining an ordinary meaning dependant under tax law than super funds use when defining a SIS dependant.