What is a lump sum death benefit?
A superannuation death benefit is a benefit paid to a dependant beneficiary from a superannuation fund after the member has died.
This can be paid as either a superannuation income stream or a lump sum payment, and it governed by the rules and regulations of the super fund, as well as the Superannuation Industry (Supervision) Regulations 1994 (SISR).
Tax implications of lump sum death benefits
Unfortunately, many people are unaware the death benefit payments from a superannuation fund can be subject to tax, depending on who receives the payment.
However, a lump sum death benefit will be tax-free if the benefit is received by a person who is dependant on you.
Who is a dependant?
A dependant can be:
- A spouse or de-facto spouse of the deceased;
- A former spouse or de-facto spouse;
- A child of the deceased under 18 years of age;
- Any person who relied on the deceased for financial maintenance at the time of their death; or
- Any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic and personal care (i.e. including persons in a same-sex relationship).
A “death benefits payment” includes such benefit that is directly paid to the dependant or paid into the deceased estate and then distributed to the beneficiaries. It must, however, be clearly stated in the Will that the death benefit is to be allocated only to death benefits dependants in order for the death benefit to be received tax-free. If the Will does not make this provision the Australian Tax Office is likely to allocate the death benefit pro-rata across beneficiaries of the estate in accordance with their entitlements to the estate residue (i.e. if your Will includes a testamentary trust, the death benefit should either be specifically excluded from the Trust or only benefits dependants should be potential beneficiaries).
If a death benefit is paid from a superannuation fund as a lump sum to a non-dependant person who is not a death benefits dependant the following tax implications arise:-
- The tax-free component is not subject to tax.
- The taxable component (element taxed in the fund) is taxed at 16.5%.
- The taxable component (element untaxed in the fund) is taxed at 31.5%.
Therefore, as superannuation benefits are likely to become one of your most valuable assets it is important to know who is and is not a dependant for income tax purposes so that you can make more appropriate arrangements in determining who you want the benefit to be paid to if you die.
For more information or for advice related to Superannuation, contact the experienced team at Rockliffs Lawyers today.