Although superannuation death benefits are tax-free when paid to individuals who are ‘dependants under the tax laws’, a ‘death tax’ continues to apply when super monies are paid to individuals who are ‘dependants under the super laws’ BUT are ‘non-dependants under the tax laws’.
Dependants under the super laws can receive death benefits directly from a super fund, and dependants under the tax laws pay no death benefits tax on those payments.
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 financially independent adult children 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.
Death benefits 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. In certain circumstances, the two people can be living temporarily apart. For more information, see section 10A of the SIS Act.
Note one: 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 adult child can receive superannuation death benefits, but is likely to pay tax on those super benefits. (Note however, that an adult child, financially dependent on a deceased fund member will also be considered a dependant under the super laws).
Note two: 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.
Tip: For a summary of the rules applying to superannuation death benefits, see SuperGuide article Superannuation death benefits: Who receives super payments, and how much tax is paid?
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.
Superannuation death benefits just got a lot more complicated
Since 1 July 2017, the government has imposed a cap on the amount of super that can be transferred into retirement phase (see SuperGuide articles Retirement phase: A super guide to the $1.6 million transfer balance cap and Superannuation death benefits and the $1.6 million transfer balance cap). The government has also abolished the anti-detriment payment rules (see SuperGuide article Anti-detriment payments banned since July 2017).
Important: If you are part of a couple, and the combined super benefits of your spouse and yourself are likely to exceed $1.6 million when one of you pass away, then note that any benefits either of you receive as a death benefit, or death benefit pension, will count towards the surviving spouse’s individual transfer balance cap. For more information, see SuperGuide article Superannuation death benefits and the $1.6 million transfer balance cap.
For more information…
For more information on superannuation death benefits, see the following SuperGuide articles:
- Superannuation death benefits: Who receives super payments, and how much tax is paid?
- Superannuation death benefits: Dear Dad, Tax for everything
- Death benefits: Is a binding DBN different from a reversionary pension?
- Superannuation death benefits and the $1.6 million transfer balance cap
- SMSF pension earnings remain tax-free after death
- Estate planning: How can an SMSF live forever?
- Anti-detriment payments banned since July 2017