Superannuation Death Benefit

A superannuation death benefit is a payment to a dependent beneficiary or to the trustee of a deceased estate. The recipient and form of the payment will depend on the rules of the superannuation fund and the requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Unlike other assets, superannuation does not automatically form part of a deceased estate.

Nominating a beneficiary

If a super fund’s rules allow, a person can nominate a beneficiary, and the nomination can be binding or non-binding. A beneficiary must fit the definition of “superannuation dependant”, which includes a spouse or de factor partner, child of any age, or someone who was financially dependent on, or in an “interdependency relationship” with, the person at the time of their death. An interdependency relationship exists between two people if they have close personal relationship, live together and one or each relies on the other for financial support, domestic support, or personal care.

If a nomination is not made, a superannuation fund trustee may use their discretion to decide who should receive the payment, regardless of what is indicated in a will, or to make a payment to the deceased’s legal personal representative (executor of the deceased estate) to distribute the payment in accordance with the deceased’s will.

Some superannuation funds do not allow members to make binding nominations, only non-binding ones.

Binding nomination

For a binding nomination to be valid, it must be in writing, signed by the superannuation holder, and witnessed by two adults not mentioned in the nomination. A beneficiary must also meet the definition of a superannuation dependant and the proportion payable to each beneficiary must be certain. Some nominations must be renewed after 3 years, while others can be indefinite. Binding nominations allow the superannuation death benefit to be paid faster and with fewer hassles than if the benefit is directed to an estate or the payment of it is left to a trustee’s discretion. Also, the benefit is more likely to pass to an intended beneficiary.

A binding nomination can be challenged in circumstances such as where:

• the nomination process was not followed properly;
• the beneficiary does not meet the definition of an eligible beneficiary;
• the nomination was not received by the fund trustee before the superannuation-holder’s death;
• the nomination was not made voluntarily;
• the nomination was made at a time when the superannuation-holder lacked mental or legal capacity.

Non-binding nomination

A non-binding nomination means a superannuation fund trustee will consider the nomination as an indication but has full discretion to pay the benefit to who they believe is the most appropriate beneficiary. This could be to one or more individuals or to an estate. Alternatively, the trustee can make a payment to the deceased’s legal personal representative (executor of the deceased estate) to distribute the payment in accordance with the deceased’s will.

If a dispute arises over who is to be a beneficiary, it may need to be resolved through the Australian Financial Complaints Authority or through the courts. If the superannuation death benefit is paid to an estate and the deceased’s will does not provide for it, or the deceased died without a will, the benefit may be distributed according to the intestacy laws of the applicable state.

Taxation of a superannuation death benefit

A beneficiary will usually receive the payment as a lump sum, but can choose to receive it as an income stream instead.

Tax payable on a superannuation death benefit depends on a range of factors, including:

• whether the beneficiary meets the definition of a “tax dependant”;
• whether the benefit is paid as a lump sum or income stream;
• tax components of the interest;
• whether the fund includes proceeds from insurance policies;
• the age of the deceased at the time they died and the age of the beneficiary;
• whether the benefit is paid from a taxed or unpaid superannuation scheme.

The definition of tax dependant is slightly different to that for a superannuation dependant, in that it applies to a former spouse or de facto, and to any person dependent on the deceased. For taxation purposes, the definition of interdependency relationship extends to two people who have a close personal relationship but do not satisfy the other requirements because either or both of them suffer from a physical, intellectual or psychiatric disability.

No tax is payable on the tax-free component of super where is it received as a lump sum or an account-based income stream. Tax rates vary when the benefit is received as a capped defined benefit income stream.

A non-tax dependant can receive the benefit as a lump sum only and will pay a marginal tax rate on the superannuation death benefit.

Tax returns

If a superannuation death benefit is received through a deceased estate, the estate will have paid tax on the beneficiary’s behalf, so the death benefit is not included as assessable income on a tax return.

If a superannuation death benefit is received directly from a superannuation fund, the fund will provide an income stream payment summary to show details such as the taxable and non-taxable components, and withholding amount, to help complete a tax return.

For advice or representation in any legal matter, please contact Armstrong Legal.