Tax obligations relating to superannuation death benefits should be considered when making your nominations
When it comes to super death benefits there are two overarching areas of law which affect beneficiaries – superannuation law which sets out who a death benefit is payable to, and taxation law which sets out how the death benefit will be taxed.
Your super fund can pay a death benefit to two types of beneficiary – a dependant or non-dependant.
Under superannuation law a dependant is someone who, at the time of your death, was your spouse or de facto partner; one of your children (any age); or some other person who you were in a financial, domestic, or personal, interdependency relationship with.
Under taxation law the definition of dependant is broader. Someone is considered a tax dependant if, at the time of your death, they were your current or former spouse or de facto partner (of any sex); any child aged under 18; someone who was in an interdependency relationship with you; or any other person who was dependent on you.
A dependant can choose whether they receive a super death benefit as a lump sum or a pension. Excluding a child with a permanent disability, the income stream option must change to a lump sum on or before the date a child turns 25 years old.
As tax has already been paid on super every time contributions were made, both the taxed and untaxed components of your death benefit are paid to a dependant beneficiary without further tax payable.
If the death benefit is taken as an account-based income stream, a dependant beneficiary aged 60+ will be required to pay tax at marginal rates (with a tax offset of 10%) on the taxable component. If aged under 60, the taxed element attracts tax at marginal rates (with a tax-offset of 15%).
A non-dependant can only receive a lump sum benefit which will be taxed at the maximum rate of 15% for the taxed element and 30% for the untaxed element, plus the Medicare levy.
Given the complexity of both superannuation and tax laws, independent financial and legal advice is highly recommended. Scammell & Co can assist you with your estate planning requirements including death benefit nominations.
Click here for general information on the extensive range of estate planning services offered by Scammell & Co.
*This information is current at the time of publication. For accurate legal advice, please contact Scammell & Co on 08 8440 270.
In addition to having a Will, residual superannuation needs to be dealt with before you die
Having a valid Will in place ensures that in the event of your death your assets and interests go to the right person(s). Your superannuation however, does not automatically form part of your estate assets and therefore is not subject to the terms of your Will. Superannuation law and self-managed super fund (SMSF) governing rules determine distribution of super death benefits.
It is helpful to think of your superannuation fund as a trust fund and any distributions of death benefit can only be made at the discretion of the fund’s trustee in accordance with the Superannuation Industry Act 1993 and the fund’s trust deed. As such, death benefits can only be paid to the member’s dependants (spouse or de facto partner, children, or other legal dependants). If you wish your super to go to someone else, you must nominate a “legal personal representative”, typically the executor of your estate, and deal with it in your Will.
Superannuation death benefits are tax-free when distributed to dependants, but there are tax consequences if funds are distributed to individuals considered non-dependants by taxation laws.
Superannuation death benefits must be paid as a lump sum and/or income stream, with several options as to how it is distributed. These include a lapsing or non-lapsing binding death benefit nomination (BDBN), a non-binding nomination, a reversionary nomination for an income stream, or in the case of SMSFs, incorporate your wishes into the fund’s trust deed.
It is important that your BDBN is valid and up-to-date (generally nominations expire after three years), so that it reflects your current circumstances, otherwise it may lead to unintended consequences.
A Scammell & Co. Wills and Estate Planning lawyer will ensure your assets, including super, are dealt with according to your wishes.
Click here for further information on how Scammell & Co can help you with your estate planning requirements.
*This information is current at the time of publication. For accurate legal advice, please contact Scammell & Co on 08 8440 270.
Estate planning issues concerning a self-managed superannuation fund
Superannuation is likely to be one of your major assets/financial resources. If you have a self-managed superannuation fund (SMSF) it is important to consider who will control it if you become incapacitated or die. You also need to consider what arrangements are in place to ensure payment of your death benefit to your beneficiaries.
Loss of mental capacity:
All members of your SMSF must also be eligible to act as trustees of the fund (or directors of a corporate fund). Trustees control the day-to-day decision making of the fund. As a trustee of your SMSF, it is important that you have an Enduring Power of Attorney (POA) in place in the event you lose mental capacity. If loss of capacity were to occur it could lead to the cessation of your role as the fund’s trustee (or company director). Your appointed POA must be someone you trust to manage your affairs.
Death of a SMSF trustee/member:
Your superannuation death benefit does not automatically form part of your deceased estate. A binding death benefit nomination (BDBN) generally overrides trustee discretions and can help avoid disputes - but only if it is valid and correctly executed. Read your trust deed carefully to determine the requirements for format, witnessing and renewal. Also, if you are receiving a pension from your SMSF you ought to have made a reversionary pension nomination so that your spouse or dependent children continue to receive payments. This would not be suitable if you wish for benefits to be paid to a non-dependant adult child, more than one person, or, to your estate.
Beneficiaries:
Under superannuation law benefits can only be directed to a current spouse (legal or de-facto), child (including step-child), financial dependant or executor of your estate. Any other nomination may be fully or partially invalid and revert to trustee discretion. Also, your current spouse is a potential beneficiary of your super – even if you are separated, in which case you may wish to consider whether or not a divorce can be pursued.
Tax planning:
Withdrawals made after age 60 are tax-free (unless withdrawn from an untaxed fund). But if you pass away with a taxable component in your account, beneficiaries may be required to pay tax on that component. So that funds can flow through to the estate and on to family members tax-free, one option is to employ a re-contribution strategy whereby members convert taxable balances to tax-free balances.
As always, seek professional advice as every situation is unique.
Malcolm Daws
Senior Solicitor / Consultant
Wills & Estate Planning
mdaws@scammell.com.au
*This information is current at the time of publication. For accurate legal advice, please contact Scammell & Co on 08 8440 270.