The tax on superannuation death benefits varies depending on the recipient of the benefits, the components that make up the benefit and the for in which the benefit is paid.

Tax on superannuation death benefits can be quite considerable and have a significant impact on the net benefit received by the intended recipient.

There are in fact ways in which death benefits tax can be significantly reduced or even eliminated, which will be discussed later in this article.

The important thing is to first understand how tax on superannuation death benefits is applied.

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Tax on Superannuation Death Benefits – Tax Components

Understanding tax components is first step to understanding Death Benefits Tax.

A deceased’s superannuation savings are made up of 2 main components and 2 sub-component.

The 2 main components are

The Taxable Component is then made up of 2 sub-components

  • Taxed Element
  • Untaxed Element

You are easily able to find the components that make a superannuation account balance by contacting the superannuation fund provider. If you are dealing with a SMSF, you can contact the administrator of the Fund.

The Tax Free Component comprises of contributions made to your superannuation account where a tax deduction has not been claimed – after tax super contributions.

The remainder of the balance is the Taxable Component.

This Taxable Component is then further broken down into the Taxed Element and the Untaxed Element.

The Untaxed Element is generally the portion of the balance that has not incurred contributions tax. This may include rollovers from an untaxed source, such as a defined benefit account, or it may be proceeds from a life insurance policy owned within superannuation that was paid into the deceased members account upon their death. Some people like to own life insurance within superannuation due to the ability to claim premiums as a tax deduction, whereas others have life insurance within super as part of their default cover or employment arrangement.

The tax on superannuation death benefits will be influenced by the type of component.

Tax on Superannuation Death Benefits – Tax Rates

The first and simplest application of death benefits tax is this: THE TAX FREE COMPONENT IS NOT ASSESSABLE AND NOT EXEMPT INCOME AND IS THEREFORE NOT SUBJECT TO TAX.

In no circumstances will the Tax Free component be subject to Death Benefits Tax. Therefore, the portion of the death benefit that is the Tax Free component can be excluded from our calculations.

We then need to look at the Taxable Component.

The tax on superannuation death benefits is also influenced by the recipient of the death benefit.

All superannuation death benefits must be paid to a ‘dependent’, as defined by superannuation legislation (superannuation dependent).

Different tax will apply whether the death benefit is paid to a ‘dependent’ or ‘non-dependent’ as defined by the tax legislation (tax dependent).

Most commentary relating to dependents of superannuation death benefits relates to whether or not they are a tax dependent, as it is assumed they are superannuation dependents if they are receiving a benefit.

Tax on Superannuation Death Benefits Paid to a Dependent

The table below illustrates how Death Benefits is applied when paid to a dependent of the deceased.

Age of Deceased at Death Type of Death Benefit Age of Recipient Tax on Taxed Element Tax on Untaxed Element
Any Age Lump Sum Any Age 0% 0%
Age 60 and Above Income Stream Any Age 0% MTR less 10% tax offset
Below Age 60 Income Stream Age 60 and Above 0% MTR less 10% tax offset
Below Age 60 Income Stream Below Age 60 MTR less 15% tax offset MTR (no tax offset)

Tax on Superannuation Death Benefits Paid to a Non-Dependent

The table below illustrates how Death Benefits is applied when paid to a dependent of the deceased.

Age of Deceased at Death Type of Death Benefit Age of Recipient Tax on Taxed Element Tax on Untaxed Element
Any Age Lump Sum Any Age Max 15% Max 30%
Any Age Income Stream Any Age Not permitted after 1 July 2007. Death Benefit income streams commenced prior to 1 July 2007 taxed as if paid to a dependent Also not permitted. Also taxed as if paid to dependent

MTR = Marginal Tax Rate

Who is a Tax Dependent

A dependent of the deceased includes:

  • a surviving spouse or de facto spouse
  • a former spouse or de facto spouse
  • a child of the deceased who is under age 18
  • ant other person who was financially dependent on the deceased
  • any person who had an interdependency relationship with the deceased

 Reducing or eliminating Tax on Superannuation Death Benefits

Death Benefits Tax and Tax Components (including strategies) is an extremely complex area. It is essential that tax advice and/or financial planning advice is sought prior to implementing any strategies or paying a death benefit. There are many consequences that can result from incorrect application of superannuation and tax legislation.

Reducing the ‘Taxable Component of a superannuation balance prior to death and increasing the ‘Tax Free component is the only way to reduce or eliminate Death Benefits Tax.

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This can only be done prior to death. One way to do it is to withdrawal all or some of the superannuation balance and recontribute it back into superannuation as a Non-Concessional Contribution. This should really only be considered if you have full unlimited tax free access to your superannuation benefits and also have the ability to recontribute it back into your account without exceeding the Non Concessional Contribution cap. This recontribution strategy can effectively exchange Taxable Components with Tax Free Components. Seek advice from a financial planner if you are considering this strategy, as it may have an impact on your estate planning, social security, taxation, etc.

Keep in mind that ll withdrawals must be made proportionately from each component.

A much simpler way of eliminating or reducing Death Benefits Tax is for a member to make a full or partial withdrawal of their superannuation balance prior to death if possible – having regard to tax on withdrawals and any estate planning considerations.

If you would like anything clarified or have any further questions about Tax on Superannuation Death Benefits or any other topics, please do not hesitate to leave a comment.

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Chris Strano

Chris Strano is a specialist independent superannuation author for SuperGuy.com.au - one of Australia's leading superannuation information resources.

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