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 death benefit is likely to be taxed, depending on the components of the super benefit.
Dependant definition: A dependant (as defined under the taxation laws, 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 ‘interdependency relationship’ (interdependent relationship) with the deceased. An interdependency (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 the 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.
Update: Taking effect from 1 July 2017 (subject to legislation), the government is imposing a cap on the amount of super that can be transferred into pension phase (see SuperGuide articles Burden for retirees: Monitoring $1.6 million transfer balance cap and Superannuation death benefits and the $1.6 million transfer balance cap). The government is also abolishing the anti-detriment payment rules (see SuperGuide article Anti-detriment payments banned from July 2017).
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 paid to a non-dependant under the tax laws means that tax is payable on the taxable component of a superannuation 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 always 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.