Your superannuation death benefits must be paid to someone when you die. That somebody will usually be your estate or your nominated beneficiary (also known as your dependents).
Paying death benefits to your estate
Unlike other assets such as shares and property, your superannuation and any insurance benefits you have in superannuation do not form part of your estate. That’s because your superannuation is not held by you personally, rather it is held in trust for you by the trustee of your superannuation fund.
However, you can direct your superannuation death benefit to your estate by nominating your “legal personal representative” (LPR), who will usually be the executor of your estate.
If you nominate your estate or LPR, you must also specify in your Will who you want to distribute your superannuation money to. This can include eligible beneficiaries (see below) as well as anyone else you wish to leave your death benefits to.
As such, it’s important that the directions stated in your Will are up to date so your LPR pays out your death benefits (as well as your other estate assets) as per your wishes.
Paying death benefits to a beneficiary/dependent
If you want your superannuation death benefits to be paid to a person, that person must be a “dependent” for superannuation purposes.
The meaning of dependent is important as it determines who can receive a death benefit, whether the death benefit will be taxed, and in what form your death benefit can be paid out (i.e., lump sum, income stream, etc.). In particular, superannuation law determines who can receive your superannuation directly from your superannuation fund without having to go through your estate. These people are your superannuation dependents. Tax law on the other hand determines who pays tax on your superannuation death benefit. These people are considered tax dependents.
The following table summaries the difference between:
- A superannuation dependent and tax law dependent, and
- The types of death benefit that can be paid to each category of dependents.
|
Super dependent? |
Tax dependent? |
Can death benefits be received directly as a lump sum? |
Can death benefits be received as an income stream? |
|
|
Spouse (includes de facto and same-sex) |
Yes |
Yes |
Yes |
Yes |
|
Former spouse |
No |
Yes |
No |
No |
|
Children under the age of 18 |
Yes |
Yes |
Yes |
Yes1 |
|
Children aged 18 or over |
Yes |
No |
Yes |
No |
|
Interdependent relationship |
Yes |
Yes |
Yes |
Yes |
|
Financial dependent |
Yes |
Yes |
Yes |
Yes |
|
An individual who receives a super lump sum because the deceased died in the line of duty2 |
No |
Yes |
Yes |
No |
- The income stream must be commuted by the time the child turns 25 unless the child has a prescribed disability
- The deceased died in the line of duty as a member of the Defence Force, Australian Federal Police, the police force of a state or territory, or as a protective service officer.
The income stream must be commuted by the time the child turns 25 unless the child has a prescribed disability
The deceased died in the line of duty as a member of the Defence Force, Australian Federal Police, the police force of a state or territory, or as a protective service officer.
As can be seen, the key differences between the superannuation and tax-dependent definitions are:
- a tax dependent does not include an adult child (whereas a superannuation dependent does), and
- a tax dependent includes a former spouse (whereas a superannuation dependent does not).
Although your financially independent adult children are your superannuation dependents and can receive a death benefit directly from your superannuation fund, they are not tax dependents. This means they will not receive more favourable tax treatment than a tax dependent would receive unless they qualify under an ‘interdependency relationship’ or are financially dependent on you.
A tax dependent will generally not pay any tax on superannuation death benefits. In contrast, a non-tax dependent is taxed on any taxable components of a superannuation death benefit. This could be up to 15% tax plus Medicare levy on any taxable component and potentially up to 30% plus Medicare levy for any taxable untaxed elements within your fund.
Tip – if you would like to leave your superannuation to someone who is not a dependent under superannuation law, you could consider nominating your LPR and then use your Will to determine how you would like superannuation death benefits to be paid.
For example, if you wish to nominate your parent, or financially-independent sibling, cousin, or friend, you could make a binding nomination to your LPR and then instruct them on how to divide your superannuation through your Will.
Need help?
Please contact us if you would like further information about who you can nominate to receive your superannuation death benefits.
Disclaimer: This update is intended as general information and is not tailored to individual circumstances. Please get in touch with us if you would like specific advice.