- Binding Death Benefit Nominations
- What is the definition of a dependant?
- What are the tax consequences of an Superannuation Death Benefit payment?
- Strategies for superannuation death benefits
The two certainties in life, namely death and taxes, is an idiom that can mean different things to different people. For present purposes we take it to mean that death is inevitable and it is very difficult to (legitimately) avoid taxes.
Tax cannot be avoided even by dying.
Although under current law there is no tax levied on the net value of the property of a deceased person, there may be tax consequences flowing from dealings with the deceased’s property after death. There are also other laws that bear upon how the property of a deceased person (i.e. the deceased estate) is to be dealt with.
For example, not all of a person’s assets can be dealt with under a valid will. Superannuation benefits accumulating for the benefit of an individual who dies before becoming eligible to enjoy the benefits can be dealt with in a number of ways depending on the nature of the superannuation arrangement, the governing rules of the superannuation fund and whether the individual has made a binding death benefit nomination.
When a person dies their superannuation entitlements must be paid out of their superannuation fund in accordance with the SIS regulations.
An individual’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the individual dies. The method of paying death benefits from a superannuation fund is determined under the governing rules of the fund and not under the deceased’s will. A superannuation death benefit (SDB) will generally be paid to a dependant or the deceased estate of the deceased individual.
Regulations also provide that the trustee of a superannuation fund may pay a benefit to a non-dependant only where, after making reasonable enquiries, the trustee has not been able to find the legal personal representative (LPR) of the deceased or a dependant.
The trustee of a superannuation fund generally has the discretion to determine who should receive the death benefit, except where:
- the deceased has made a binding death benefit nomination (BDBN); or
- the benefit is a reversionary pension.
Binding Death Benefit Nominations
The effect of making a valid Binding Death Benefit Nomination (BDBN) is that the trustee of the fund is obliged to pay the deceased’s death benefit direct to the nominated person(s), or class of persons, in the nominated proportions. A BDBN may be revoked or amended by the person making the nomination as provided for by the fund’s governing rules.
The requirements for a BDBN include the following:
- the nominated person(s) must either be the LPR or a dependant of the deceased;
- the proportion of the benefit that will be paid to the nominated person(s) must be a fixed amount or easily determined at the time of the payment by reference to a fixed formula;
- the nomination must be in writing;
- the nomination must have been signed, and dated by the deceased in the presence of two witnesses who are aged over 18 years and are not nominated beneficiaries of the deceased’s benefits; and
- the nomination must contain a declaration signed and dated by the witnesses stating that the notice was signed by the deceased in their presence.
A BDBN that complies with the regulations has effect for three years after the day on which the nomination was first signed or last confirmed or amended by the deceased unless the deceased revoked the nomination before that time, or the governing rules of the fund specified a shorter period.
Persons wishing to change or revoke an existing BDBN must generally notify the trustee of their superannuation fund in writing, usually by completing the appropriate form. Similarly, persons who wish to continue with their BDBN must also advise their trustee in writing prior to the expiry date of the nomination.
Where there is no BDBN or if a BDBN expires and is not renewed, the trustee generally has the discretion to distribute the deceased’s superannuation benefits as they see fit. In most circumstances the trustee would choose to distribute the benefits to the deceased’s estate.
In contrast, BDBNs relating to benefits in a self managed superannuation fund (SMSF) do not automatically lapse after three years unless the SMSF deed specifically provides for such a timeframe. This is because SMSFs are not subject to the same regulations as other public funds. Theoretically, a BDBN made by a person in respect of super benefits held in a SMSF can apply in perpetuity.
Irrespective of whether a person is a member of a public fund or SMSF it is prudent to review a nomination regularly (i.e. more frequently than every 3 years) as a beneficiary’s dependant or non-dependant status may change due to turning 18 years of age or other life events, or the person may change their mind about who should receive the benefits.
As mentioned above, in the absence of a BDBN, trustees of a superannuation fund are generally given a discretion in determining how SDB proceeds are to be allocated. The Courts generally will not interfere with a trustee’s decision in the exercise of their discretion. A nomination that does not comply with the statutory requirements discussed above is non-binding. A non-binding nomination does not mean that it is invalid. However it does not override the superannuation fund trustee’s discretion. A trustee will consider the wishes expressed by the non-binding nomination but will also take other facts and circumstances into account.
A BDBN offers certainty for the deceased and their intended beneficiaries. Moreover, a valid will is not effective in binding the trustee of a superannuation fund in relation to superannuation entitlements. Therefore, it is critical to ensure that BDBNs are regularly monitored and updated to remain consistent with the deceased’s current wishes. This is especially important when there has been a significant change in life circumstances and relationships, e.g. marriage, remarriage or family breakdowns.
The following section outlines the advantages of the BDBN relative to the payment of the death benefits by the trustee of the fund or the LPR of the deceased’s estate.
Payment to dependant under a Binding Death Benefit Nomination
- Provides protection against claims that may be made against the deceased estate e.g. family provision claims or creditors.
- Allows certainty and control for the member over who ultimately receives the superannuation entitlements.
- Avoids the need for the trustee to identify potential dependants and is generally not subject to challenge in the Superannuation Complaints Tribunal.
Payment to dependant or Legal Personal Representative at trustee’s discretion
- In the absence of a BDBN the trustee has a discretion to pay benefits either to the LPR or directly to a dependant.
- May be a preferred alternative in the case of a SMSF, where all members are trustees, and may be related.
- Allows flexibility where there is a change in circumstances of dependants.
Payment to a Legal Personal Representative
- Allows distribution to beneficiaries in accordance with the member’s Will.
- Allows payment to persons who are not dependants.
- Allows payment of proceeds into a discretionary. Such a trust may be desirable because it confers asset protection for the beneficiary and allows income of minor children to be taxed at ordinary tax rates.
What is the definition of a dependant?
There are different definitions of dependant for the purposes of the superannuation laws and the tax laws. A dependant for superannuation purposes is defined to include:
- a spouse — this includes a de facto spouse and same sex spouse;
- a child — this includes a step-child, adopted child, ex-nuptial child; a child of the person’s spouse and a child within the meaning of the Family Law Act 1975; and
- any person with whom the member has an interdependency relationship (see below).
The tax treatment of payments made to the recipient of the SDB depends on whether the recipient is a death benefits dependant under the Income Tax Assessment Act 1997 (ITAA 997). A death benefits dependant is:
- a spouse or former spouse — broadly, including a de facto spouse, same-sex spouse or person in a registered relationship;
- a child of the deceased under 18 years of age — broadly, including an adopted child, step-child or ex-nuptial child and child of the individual’s spouse;
- any other person with whom the deceased had an interdependency relationship (see below); or
- any other person who was a dependant — a dependant has been held to mean any person who is financially dependent, such as a full time student who is over 18 or an infirm parent.
As you can see, the definition of dependant for superannuation purposes is slightly different from the definition of dependant for income tax purposes. The relevance is that the superannuation definition determines who can be nominated under a BDBN and the income tax definition determines the tax treatment of the benefit in the hands of the recipient.
For example, an adult child could be nominated under a BDBN but they would generally not be a death benefits dependant eligible for concessional tax treatment under the income tax rules.
The definition of ‘interdependency relationship’ is the same for income tax and superannuation purposes. Two people (whether or not related by family) have an interdependency relationship if:
- they satisfy all of the following:
- they have a close personal relationship;
- they live together;
- one or each of them provides the other with financial support; and
- one or each of them provides the other with domestic support and personal care; or
- they have a close personal relationship but do not satisfy one or more of the requirements of an interdependency relationship mentioned above because either or both of them suffer from a physical, intellectual or psychiatric disability.
In addition, the regulations specify matters that are, or are not, taken into account and circumstances in which two persons have, or do not have, an interdependency relationship. The following circumstances will be relevant for the purposes of determining if an interdependency relationship exists:
- the duration of the relationship;
- whether or not a sexual relationship exists;
- the ownership, use and acquisition of property;
- the degree of mutual commitment to a shared life;
- the care and support of children;
- the reputation and public aspects of the relationship;
- the extent to which the relationship is one of mere convenience; and
- any evidence suggesting that the parties intend the relationship to be permanent.
What are the tax consequences of an Superannuation Death Benefit payment?
The taxation of a SDB payment depends on:
- whether the recipient is a death benefits dependant of the deceased;
- whether the amount is paid as a lump sum superannuation death benefit or a superannuation income stream death benefit; and
- for superannuation income stream death benefits — the age of the deceased person and the recipient.
As discussed above, a death benefits dependant of a person who has died is:
- the deceased person’s spouse or former spouse;
- the deceased person’s child, aged less than 18;
- any other person with whom the deceased person had an interdependency relationship just before they died; or
- any other person who was a dependant of the deceased just before they died.
The tax rates applicable for superannuation death benefits are summarised in the following table:
|Type of death benefit||Age of deceased||Age of recipient||Tax treatment|
|Element taxed||Element untaxed|
|Superannuation lump sum paid to dependant||Any age||Any age||Tax free||Tax free
|Superannuation lump sum 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)
|Superannuation income stream paid to dependant||60 years or older||Any age||Tax free
|Taxed at marginal rates with a tax offset of 10%
|Any age||60 years or older|
|Under 60 years||Under 60 years||Taxed at marginal rates with a tax offset of 15%
|Taxed at marginal rates with NO tax offset
Strategies for superannuation death benefits
If an individual is aged 60 years or older and has retired, or aged 65 years and older and that individual has non-dependant beneficiaries (for example adult children and no spouse), the simplest way to minimise tax on death benefits is to withdraw funds from superannuation before death.
Assuming the benefits are from a taxed source, the individual should be able to access their benefits tax free. Moreover, from 1 July 2007, a person suffering from a terminal medical condition can also access their superannuation benefits tax free regardless of their age.
Hugh has discovered that he has a terminal medical condition at the age of 45 and has only a short time to live. He is concerned about his wife having to pay the mortgage on her smaller salary after his death and therefore decides to receive a payout from his super fund of $1.14 Million (received tax free to Hugh) allowing him to:
- Pay off the $1 million mortgage on his home; and
- Pay for $140,000 in medical treatment expenses.
However, despite Hugh’s circumstances, the super fund is not in pension phase (i.e. no current pension is being paid) meaning the fund will pay tax when its assets are sold to fund Hugh’s terminal medical condition payout.
If instead the assets had been left in the fund long term (e.g. until a future pension was paid) tax would not have applied upon their sale. However, in such a case there would not have been sufficient funds to pay off the mortgage in accordance with Hugh’s wishes.
Moe is 67 years old, currently taking a pension from his superannuation fund (i.e. the fund is in pension phase) and planning his will. He has two adult sons, Lenny and Carl, to whom he is leaving his estate in equal proportions. Moe is already concerned that his two non-dependant sons will pay too much tax when they receive an eventual death benefit on his death.
Moe decides to liquidate the assets in his fund (e.g. shares or other investments) and crystallise a capital gain in the fund, which is not subject to tax because his fund is in pension phase. Moe can then partially or fully commute his pension and pay himself a lump sum tax free. Moe could then “gift” that amount to his sons without there being any undue tax consequences.
A re-contribution strategy involves an individual withdrawing part of a superannuation benefit (usually in a tax free form) and re-contributing it to the fund as a non-concessional contribution.
For example, an individual who has reached age 60 and retired may choose to withdraw some or all of their benefits as a lump sum tax-free and then re-contribute those amounts into superannuation (i.e. make a non-concessional contribution).
The re-contributed amounts form part of, and add to, the tax-free component of the individual’s superannuation interest. This may mitigate the taxation impact when a non-dependant beneficiary receives a death benefit.
This is because maximising the tax free component in the fund will result in a larger proportion of the death benefit being treated as tax free under the proportional rule even where the benefit is paid to a non-dependant beneficiary.
In addition, an individual under the age of 60 who has reached their preservation age and retired can also access their super benefits as a lump sum tax free up to the low rate cap amount of $205,000.
The re-contribution to the fund is classified as a non-concessional contribution. Accordingly, individuals should be aware of the requirements that apply from 1 July 2017.
For example, the reduction in the concessional contributions cap to $25,000, the non-concessional contributions cap to $100,000 (or $300,000 over 3 years) and the restrictions on making non-concessional contributions where individuals have a total super balance greater than or equal to $1.6 million.
The following table outlines the conditions:
|Age of member||Conditions|
|Under the age of 65||Contributions should not exceed the annual cap of $100,000 (or $300,000 every three years) on non-concessional contributions.
Note also the $1.6 million total super balance restrictions.
|65 to 74 years||The fund cannot accept personal contributions from the member unless the member satisfies the work test.
The contribution should not exceed the annual cap of $100,000. The 3 year averaging rule is not available to this age group.
Disclaimer: The contents of this article are for the purposes of providing general information only. Persons should seek appropriate advice from a licensed financial planner before undertaking any investments or strategies with respect to their superannuation interests.