Tax on Superannuation Death Benefits

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

Income streams include reversionary pensions paid to reversionary beneficiaries.

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.

Chris Strano

Chris Strano created SuperGuy to help the average punter navigate through the complex and ever-changing super rules. It has since become one of Australia's leading digital super resources. If you’re looking for more personalised advice, have a chat with one of our experts at www.superguy.com.au/need-advice

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14 Comments

  1. Poul digney

    Hi my daughter die and left her super to me and my wife it was 120000 .it was taxed by 30000 do we get that back or is it lost and we’re is it

    Reply
    • Chris Strano

      Hi Poul, I am sorry for your loss. Tax on superannuation death benefits (known as death benefits tax) can be complex. The amount of tax payable depends on who it is paid to and the ‘tax components’ of the balance. The rate that you have described above appears to be an average of 25%, suggesting that the balance included a ‘taxable untaxed’ component, as 25% rate is greater than the standard 15% plus Medicare on the Taxable component. Unfortunately I am not much help to you here. I suggest you contact your daughters former superannuation provider to request details (provided you have authority) or speak with your accountant. Be sure to take in a superannuation statement with you. If it has been taxed correctly there is not much that can be done. This tax forms part of the Government’s overall revenue.

      Reply
  2. SANDRA SMITH

    Hi my son passed and has $208000 death benefits and $4800 in super. What would be the taxable component of the benefits ? Kindly advise. Thank you

    Reply
    • Chris Strano

      Hi Sandra,
      Sincerely sorry for you loss.
      I assume you mean life insurance payout of $208,000? If so, it is likely this will be made up of a taxable (untaxed) component. The superannuation accumulation balance, if contributed by an employer, would likely be taxable (taxed) component. But really, I am only speculating. A quick phone call to the superannuation provider will give you the information you need, including the tax components and potential tax payable.

      Reply
  3. Jason Bell

    My wife is currently dealing with amp and it’s currently in a 28 days claim staking period the amounts my wife has been asked to nominate how she would like them paid check or eft is this a before or after tax amount?

    Reply
    • Chris Strano

      To be honest, I am not sure. It would be best to check with the superannuation provider and confirm with your accountant.

      Reply
  4. Dave Allan

    Hi Chris, In regards to Death Benefits tax rate of 15% plus 2% Medicare levy. Does a non dependent who is on single parents pension still have to pay the 2% Medicare Levy as well? Is the tax paid claimable when a tax return is lodged if the death benefit recipient is a low income earner..ie under the 18200 threshhold? Thank you

    Reply
  5. Liz

    My husband passed away and I just received a lump sum death benefit. I’m currently on parenting payments from Centrelink. Will this effect my payments? Is super death benefit classed as a inheritance?

    Reply
  6. Steve

    Hi,
    My father recently passed and I’ve received a lump sum death benefit. I currently live abroad. Am I going to be have to pay tax on this amount I’ve received, it’s quite confusing this tax dependant vs super dependant and when it applies

    Reply
    • Chris Strano

      Hi Steve,
      Sorry for your loss.
      ‘Super dependant’ refers to the people who are allowed to receive superannuation death benefits. This definition includes children of the deceased.
      ‘Tax dependant’ refers to people who can receive a death benefit tax free. This includes children under 18, but does generally not include children over 18.
      For a non-tax dependant, the taxation of a death benefit is based on the tax components that make up the payments.
      The ‘tax-free’ component will be received tax free.
      The ‘taxable’ component will incur tax, as per the article above.
      Related Post:
      Superannuation Death Benefit Calculator

      Reply
  7. Mario D'Alessandro

    Hi Chris, My wife passed away aged 68 in April 2018 and had super in accumulation phase. The trustee of the fund has recently determined I will receive the death benefit. As I am a Super Dependent it should be tax free. I am 71 and already have an ABP with available transfer cap of approx $290k which is grandfathered for centrelink CSHC and a smaller accumulation account. The fund has advised they will either pay me a lump sum or rollover to an accepting provider but with the obligation it goes into a pension account. I’d like to keep some, if not all, in the super environment if possible but the benefit is over 3 times my available cap. Is there any way of keeping all or some of the benefit in accumulation phase? Is there anywhere else I can obtain such very specific advice? The fund advises it’s deed does not allow for me to retain it in it’s fund. Thanks and regards

    Reply
    • Chris Strano

      Hi Mario,
      I’m sorry for your loss.
      Ultimately, the trust deed (or rules) of a superannuation fund will determine your options for receiving a death benefit within the limits of superannuation rules.
      Generally, as a dependant of the deceased, a death benefit can be paid out as an income stream, but will count towards the recipient’s transfer balance cap.
      You might be able to opt for part of the payment to be made as an income stream and part as a lump sum payment.
      A death benefit is unable to be paid into a super accumulation account.
      If you satisfy the superannuation work test conditions, you may be able to contribute death benefit proceeds paid to you personally back into super, subject to contribution caps. However, non-concessional contributions cannot be made to super if your total superannuation balance is equal to or above the transfer balance cap, or the contribution will cause your balance to exceed this amount.
      Hope this helps.
      Chris
      Related Posts:
      Age Limits for Super Contributions
      Super Death Benefit Tax Calculator
      Accumulation Phase vs Pension Phase

      Reply

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