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Summary
- Your superannuation is not automatically covered by your Will. Who receives it is decided by your binding beneficiary nomination or, if you have no nomination or a non-binding nomination, by your fund’s trustee.
- Death benefits paid to a tax dependant, such as a spouse or a financially dependent child, are generally received tax-free.
- Benefits paid to a non-dependant, most commonly a financially independent adult child, can be taxed: generally up to 15 per cent plus the Medicare levy on the taxable component.
- Strategies such as a binding death benefit nomination, a reversionary nomination or a re-contribution strategy can reduce tax and prevent disputes.
- Getting advice before it is needed gives your family clarity and can save them thousands.
Common mistakes to avoid
- A binding nomination that has quietly lapsed, many expire after three years.
- Assuming your Will covers your super when, in most cases, it does not.
- Never updating a nomination after a marriage, divorce, new child or a death in the family.
Your super does not automatically go to your estate
Many people assume their superannuation is dealt with by their Will. It usually is not. Super is held in trust, and where it goes when you pass away is decided by the type of nomination you have made, not by your Will.
You generally have a few choices: a binding death benefit nomination, which legally directs the trustee; a non-binding nomination, which the trustee considers but is not bound by; a reversionary beneficiary, which automatically continues your pension account to a chosen person; or no nomination at all, in which case the fund’s trustee decides who receives the money. Because super is often one of the largest assets a family has, the difference between these options can be significant.
Who counts as a ‘dependant’, and why it matters
There are two different definitions at play. Under superannuation law, a wider group can receive a benefit. But for tax purposes, only certain people are treated as dependants and can receive the money tax-free.
Tax dependants generally include your spouse or de facto partner, your children under 18, someone who is financially dependent on you, and someone in an interdependency relationship with you. Importantly, an adult child who is financially independent is usually not a tax dependant, which is where unexpected tax bills most often arise.
How death benefits are taxed
A super balance is generally made up of a tax-free component and a taxable component. When a benefit is paid to a tax dependant, it is generally received tax-free regardless of the components. When it is paid to a non-dependant, the taxable component is taxed: broadly, the ‘taxed element’ is taxed at up to 15 per cent plus the Medicare levy, and any ‘untaxed element’ can be taxed at a higher rate.
Whether the benefit is paid as a lump sum or as an income stream can also change the tax outcome. These are general rules, and the actual result depends on your fund and your family’s circumstances, so it is worth confirming the numbers with an adviser.
Ways to reduce the tax your family pays
There are several legitimate strategies. A binding death benefit nomination makes your wishes certain and avoids delay. A reversionary beneficiary can let a spouse continue an income stream seamlessly. A re-contribution strategy can, over time, convert taxable components into tax-free components. In some cases, withdrawing and re-arranging funds while you are alive can also help.
Not all strategies will suit everyone. The right approach depends on your age, your balance, who you want to provide for and your wider estate plan. The value is in matching the strategy to your situation.
Frequently asked questions
Is my superannuation part of my estate?
Not automatically. Super is generally paid directly to your nominated beneficiaries, or as the trustee decides. It only forms part of your estate if it is paid to your ‘legal personal representative’, for example, through your nomination or a trustee decision.
Do my children pay tax on my super when I die?
It depends on whether they are a tax dependant. A financially independent adult child usually is not, so the taxable component of the benefit can be taxed, generally up to 15 per cent plus the Medicare levy.
What is a binding death benefit nomination?
It is a written instruction that legally requires your super fund’s trustee to pay your benefit to the people you name, provided it is valid and current. Many lapse after three years, so they need to be reviewed.
Is a death benefit paid as a pension taxed differently to a lump sum?
It can be. The form of payment and the age of both you and the recipient can affect the tax outcome. This is worth checking for your specific fund.
How often should I review my nomination?
At least every few years, and always after a major life event such as marriage, separation, a new child, or the death of a named beneficiary.
