Last week one of my clients approached me. His concern was that his elderly mother was going to pass away one day. She had a significant estate and all of her assets were invested in her superannuation fund and his question was “What happens to her superannuation money when she passes away and what will the tax implications be?”
According to the SIS Act (Superannuation Industry (Supervision) Act 1993) “death benefits” under a superannuation policy must be paid to the Legal Personal Representative of the deceased superannuant or to his dependants. (A SIS dependant is the spouse, child or any person with whom the member had an “interdependency relationship”.
- an adopted child, a stepchild or an ex-nuptial child of the person;
- a child of the person’s spouse; and
- someone who is a child of the person within the meaning of the Family Law Act 1975.
An “interdependency relationship” exists if two persons have a close personal relationship or they live together or one or each of them provides the other with financial support or domestic support and personal care. Interdependency also includes same sex partners, two elderly siblings who reside together or an adult child who resides with and cares for an elderly parent and vice versa.
If someone who is not covered under the definition of “interdependency relationship” or the deceased’s Legal Personal Representative is nominated to receive superannuation death benefits, the trustee of the superannuation fund cannot pay the benefit to that person. The trustee can only pay death benefits to the beneficiaries as defined under the SIS Act or to the Legal Personal Representative of your estate (but see below).
Binding Death Nomination
One can give to the super fund a Binding Death Benefit Nomination and this will compel the trustee to pay the death benefit as directed in the Nomination, but the beneficiaries cannot be outside of the SIS beneficiaries.
The tax implications on the death benefit recipient will depend upon the “taxable” and “tax–free” components of the superannuation contributions made to the fund during the member’s lifetime and who they are paid to. Death benefits paid to a ‘tax’- dependant (see below) will be entirely tax free. Death benefits paid to a non-‘tax’ dependant will be taxed as follows:
- the ‘taxable’ component will be subject to 16.5% tax; and
- the ‘tax-free’ component will be tax free.
A ‘tax’ dependant includes the deceased person’s spouse or former spouse; the deceased person’s child aged less than 18; any other person with whom the deceased person had an interdependency relationship just before they died; or any other person who was financially dependent on the deceased just before they died. Generally, death benefits paid to an ‘adult’ child will be subject to tax of 16.5% as per item A above (unless they were financially dependent upon the deceased).
Therefore it is critical to determine the taxable and tax-free components of the member’s superannuation contributions to ascertain the tax implications of receiving a superannuation death benefit. This will determine what actions or planning should be considered prior to death.
Deceased Estate Planning – Prevention is Better Than Cure
Determine the tax implications of the death benefit based on the taxable and tax-free components of your contributions and identify the proposed beneficiaries.
Consider paying out superannuation entitlements tax-free to the member whilst they are still alive so as to avoid the incidence of the (currently) 16.5% tax. Note that benefits paid out to a member over age 60 are entirely tax free whilst they are alive whereas benefits paid out on death are taxed per above. Review current pension arrangements to determine to what extent benefits should be paid out.
Consider a payment and re-contribution strategy. This involves paying out member benefits (tax free) and then re-contribution of non-concessional contributions. This may change the mix of benefits from taxable/tax- free to entirely tax free. There are limits on contributions and importantly contributions can only be made if the member is either under age 65 or when over age 65 they must be gainfully employed.
Does the Super Death Benefit Form Part of the Deceased’s Estate?
Unless the trustee of the fund pays the death benefit to the Legal Personal Representative of the deceased, – NO. This one is of a number of things to be aware of when doing one’s will.
The above is of a general nature and by way of brief summary only and nothing in the above should be relied on without formal qualified superannuation and legal advice being obtained first. Speak to a qualified lawyer in Perth at FLSD today.