A simple guide to what tax is payable on super death benefits

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Receiving a super death benefit: Dependant or not?
Who is a dependant under superannuation law?
Who is a dependant under taxation law?
Death benefit pensions and the transfer balance cap
Super death benefits: How are they taxed?

When you die, the tax man can be pretty quick to put his hand out to take his cut. This also applies to the balance of your super account.

But working out just how much of your super savings will be paid to your nominated beneficiaries and how much will go to the ATO isn’t straightforward.

Some beneficiaries will get their money tax free, while others can pay quite a bit of tax on the funds they receive. So, it makes sense to understand how the rules work to ensure your super death benefit is paid tax effectively.

Did you know? When the balance of your super account is paid out to your nominated beneficiaries following your death, it’s called a super death benefit.

For more about nominated beneficiaries, see SuperGuide article Who gets your super when you die? A guide to death benefit nominations.

Receiving a super death benefit: Dependant or not?

To work out the tax rate that will apply when your nominated beneficiaries receive their money, you first need to know who is and isn’t considered your dependant under both super and taxation law.

Your super fund can pay out a super death benefit to two different categories of beneficiaries when you die:

1. Your dependants

To make things nice and complex, there are two definitions for the dependant of a super fund member. One relates to who is entitled to receive a super death benefit payment (superannuation law) and the other one is for how the super death benefit will be taxed (taxation law).

Your dependants can choose whether they want to receive the super death benefit as a lump sum or as an income stream.

2. A non-dependant

If your beneficiary doesn’t meet the definition of your dependant under super law, they will be considered a non-dependant.

From 1 July 2007, non-dependants can only receive a super death benefit as a lump sum.

Who is a dependant under superannuation law?

When it comes to receiving a super death benefit, super law considers you to be a dependant of the deceased super fund member if at the time of their death you were:

Their spouse or de facto spouse
One of the member’s children (any age)
In an interdependency relationship with the person.

Need to know: Under super law, you are considered to be in an interdependency relationship if you and the other person live together, have a close personal relationship, and one of you provides the other with financial support and domestic support and personal care.

If you want to leave your super to someone who is not classified as your dependant under super law, consider making a binding death benefit nomination (BDBN) to have the payment made to your legal personal representative. This way your super can be distributed under the terms of your Will.

Who is a dependant under taxation law?

The definition of a dependant is different under taxation law and this is important when it comes to working out how much tax beneficiaries will need to be paid on any death benefit they receive.

You are considered a tax dependant of a deceased super fund member if at the time of their death you were:

Their spouse or de facto spouse (of any sex)
Their former spouse or de facto spouse (of any sex)
One of their children aged under 18
In an interdependency relationship with them
Any other person dependant on the deceased.

Under taxation law, the definition of an interdependency relation is similar to the one under super law, but the definition can be wider in disability cases. Children aged over 18 must have been financially dependent to be considered a dependant. For more information, see the ATO website here.

Super tip: Under tax law, adult children are only allowed to receive an income stream from a super death benefit if they are aged under 25 and were financially dependent on the deceased super fund member or have a permanent disability. Adult children with a permanent disability can continue to receive an income stream after they reach age 25.

Once an adult child without a permanent disability reaches age 25, their income stream must be converted into a lump sum. The lump sum is received tax free.

Death benefit pensions and the transfer balance cap

The transfer balance cap (TBC) rules also come into play when it comes to super death benefits.

The TBC rules limit the amount of super savings that you can transfer into the retirement or pension phase ($1.7 million from 1 July 2021; from 1 July 2017 to 30 June 2021 the TBC was $1.6 million). Penalties apply if you transfer amounts in excess of your TBC.

Although the TBC is important when it comes to retirement pensions, the TBC limit also applies to super death benefit pensions. This type of income stream is also counted towards your TBC, so if you become entitled to receive a super death benefit pension, you need to ensure it does not push you over your TBC.

If you risk going over your TBC by taking a super death benefit as an income stream, you may need to consider strategies such as taking the death benefit as a lump sum, taking a mix of pension and lump sum, or using a recontribution strategy.

The rules governing this area are very complex, so you should always seek professional advice before taking any action.

For more information on the TBC, read SuperGuide article Definitive guide to the Transfer Balance Cap.

Super death benefits: How are they taxed?

If you now have your head around who is and isn’t a dependant under both super and tax law, it’s possible to work out how tax is applied when your beneficiaries receive their super death benefit.

The tax rate applying when a super death benefit is paid to a beneficiary is different depending on whether it relates to the tax-free component or the taxable component (taxed and untaxed elements) of the death benefit.

For more information about the tax-free and taxable components of a super account, read SuperGuide article Proportioning rule and super tax: What it is and why it matters.

The components of a super death benefit have different tax rates:

1. Tax on the TAX-FREE component of a super death benefit

As tax has already been paid on this money when it was contributed into your super account, the tax-free component of your super death benefit is generally paid to your beneficiaries without the need to pay any further tax.

Your beneficiaries will not pay tax on the tax-free component of a super death benefit whether it is withdrawn as a lump sum, or they choose to receive it as an account-based income stream.

2. Tax on the TAXABLE component of a super death benefit

Although the tax-free component of a super death benefit does not incur tax, your beneficiaries may be required to pay tax on the taxable component of your super death benefit. The amount of tax they will have to pay depends on:

Whether your super benefit is paid to your nominated beneficiaries as a lump sum or super income stream
Whether the person receiving the benefit is a dependant under taxation law
The age of the beneficiary (for some income streams)
Your age when you die (for some income streams)
Whether the income stream is a capped defined benefit income stream or an account based income stream.

The table below summarises how the taxable component of a super death benefit is taxed in common situations:

Type of death benefit	Age of beneficiary	Age of deceased	Tax on taxable component
Type of death benefit	Age of beneficiary	Age of deceased	Taxed element	Untaxed element
Lump sum
Paid to dependant	Any age	Any age	Tax free	Tax-free
Paid to non-dependant	Any age	Any age	Taxed at a maximum rate of 15% (plus Medicare levy)	Taxed at a maximum rate of 30% (plus Medicare levy)
Account-based income stream
Paid to dependant	60 years or older	60 years or older	Tax free	Taxed at marginal rates with a tax offset of 10%
Paid to dependant	Under 60 years	Under 60 years	Taxed at marginal rates with a tax offset of 15%	Taxed at marginal rate

Source: Based on information from the ATO website.

Case study 1: Superannuation death benefit paid to dependant

Leon was a member of a large industry super fund for many years and he nominated his wife Josie as the beneficiary for his super death benefit of $175,000.

When he died unexpectedly at age 63, Josie applied to the super fund to receive Leon’s super death benefit as a lump sum payment.

As Josie was Leon’s surviving spouse, she was classified as a dependant under tax law and so she received his full super death benefit of $175,000 as a tax-free lump sum.

Case study 2: Taxed and tax-free components of super death benefit paid as income stream

Wendy was receiving an account-based super income stream (which had a balance of $250,000) from her super fund when she passed away at age 67.

The tax-free proportion of her $250,000 income stream is 25%, with the remaining 75% being the taxable proportion.

Wendy’s spouse Raffa is her beneficiary and he decides to take her account balance as a lump sum. Raffa is paid the lump sum in the same proportions of tax-free and taxable components as Wendy’s income stream.

This means Raffa’s tax-free and taxable components from the lump sum death benefit are:

Tax-free component = $250,000 x 25% = $62,500

Taxable component = $250,000 – $62,500 = $187,500

Raffa is considered Wendy’s dependant under tax law, so he receives the entire lump sum tax free.

If Raffa was considered a non-dependant under tax law, the taxable component of the lump sum ($187,500) he received would be subject to tax, with different rates applying to the taxed and untaxed elements (see table above).