Beware of hidden tax on super death benefits

A super death benefit is the super paid after a person’s death, usually to a nominated beneficiary.

These benefits are subject to different tax treatments, depending on whether the beneficiaries are dependant or non-dependant.

Superannuation death benefits will generally be received tax-free by tax dependants, who are considered to be:

• A child of the deceased who is under 18 years of age,
• A spouse or former spouse of the deceased,
• A person who has an interdependency relationship with the deceased (e.g. if they live together or have a close personal relationship),
• A financial dependant of the deceased.

Dependants will not have to pay tax on the tax-free component of their super in the event that they:

• Withdraw it as a lump sum, or
• Receive an account based income stream.

Not all super death benefits are subject to tax; for nondependants, there is a taxable portion. This component is largely made up of after-tax super contributions that the deceased member has made.

Super death benefit payments are subject to tax when:

• The payment is provided to a non-dependent for tax purposes,
• The payment has a taxable component.

Non-dependants must calculate how much money in the super account is a:

• Tax-free component,
• Taxable component the super provider has paid tax on (taxed element),
• Taxable component the super provider has not paid tax on (untaxed element).

The amount of tax non-dependants pay will be based on their marginal tax rate; however, this amount may be reduced by tax offsets. For the taxed element of the taxable component, the effective tax rate is your marginal tax rate or 17% (whichever is lower). For the untaxed element of the taxable component, the effective tax rate is 32% or your marginal tax rate (whichever is lower).

Review your existing Super Death Benefit Nominations today to ensure your affairs are structured in the most tax effective manner for your beneficiaries.