Key points
- Super death benefits are divided into tax-free and taxable components, with the tax-free portion including after-tax contributions and the taxable portion comprising employer and deductible contributions plus earnings.
- Tax outcomes depend on the beneficiary’s relationship to the deceased, their age, and whether the benefit is paid as a lump sum or income stream.
- Tax dependants generally receive lump sum benefits tax-free, while non-dependants may face up to 15% tax (plus Medicare levy) on the taxable component.
There are a number of factors that determine whether tax will be payable on superannuation death benefit payments.
In a situation where super is paid out after an individual has passed, the death benefit is generally split up into two components: taxable and tax-free. The tax-free portion of a super death benefit is tax exempt and can include after-tax contributions and government co-contributions, whilst the taxed component is primarily made up of employer contributions, personal contributions (when a tax deduction is claimed) and salary sacrificed contributions, along with fund earnings.
Factors that determine whether tax is payable on super death benefits
Upon receiving a super death benefit, the amount of tax the beneficiary will be required to pay will depend on several factors, including:
- The beneficiary’s age, and the age of the deceased member at the time of death,
- Whether the beneficiary is a “dependant” of the deceased for tax purposes,
- Whether the beneficiary was financially dependent on the deceased at the time of death, or an interdependency relationship existed,
- Whether the deceased member’s income stream is account-based or a capped defined benefit income stream,
- Whether the death benefit is paid out as a lump sum, or as an income stream, and
- Any untaxed element of the deceased member.
Tax on super death benefits for dependants
Beneficiaries that are financial dependants of the deceased for tax purposes are not required to pay any tax on receipt of a death benefit lump sum payment. However, varying rates may apply if the beneficiary receives the death benefit in the form of an income stream. For example, if either the deceased member or their surviving spouse was aged 60 or over at the time of death, a death benefit account-based income stream will generally be tax free in the hands of the surviving spouse. Alternatively, if both individuals were under 60 years old at the time of death, the taxable component of the account-based income stream would be taxed at the surviving spouse’s marginal tax rate (less a 15% tax offset).
Tax on super death benefits for non-dependants
In cases where the beneficiary is not a financial dependant of the deceased individual, the beneficiary will generally only be able to receive death benefit payments in the form of a lump sum. The taxable component of the death benefit lump sum will be taxed at a maximum rate of tax of 15% (excluding Medicare levy).
For any advice on the super death benefit and tax implications please contact us.
