In my previous article, I highlighted the fact that superannuation lump sums may be subject to a ‘death tax’. How much tax applies to the ‘taxable component’ of your super death benefit will depend on your age at death and the age of beneficiaries, whether the recipient is a dependant and whether the benefit is paid as a pension or a lump sum.
For dependants receiving a lump sum benefit, no tax is applicable regardless of age. However, for non-dependants, a tax rate of 15% generally applies plus the Medicare Levy of 2%.
Example 1. Don is happily married to Susie. Don dies suddenly aged 59. As his dependant, Susie receives his entire super benefit tax free.
Example 2. Fiona, aged 64 and widowed, has a taxable component in her super of $200,000. She dies and has advised the trustees of her super fund to pay her death benefit directly to her only adult child, who is not a dependant. Her son will be obliged to pay tax of $34,000 (17% of $200,000). If Fiona had advised the trustees to pay her benefit to her estate, the Medicare Levy would not apply. This alone would save $4,000 in tax. Her child could then receive an increased benefit, assuming he is the sole beneficiary of her estate.
Example 3. Mary, aged 74, has some warning that she has just months to live. She withdraws her entire superannuation benefit of $300,000 tax free, as she is over 60, and banks it. She has an adult daughter, who is not a dependant but is her sole beneficiary. Because Mary took appropriate action, her daughter will pay no tax on what was her super benefit.
These examples provide a glimpse of the complexity of superannuation death benefits and how to deal with them. Personal circumstances can vary enormously, so it is important to consider how you wish your super benefits to be paid should you die. You can allow the trustees’ discretion when paying your benefits or make a ‘binding nomination’, which is legally binding.
It is also a sound idea to have a current will that is consistent with any instructions you provide to superannuation trustees. A little thought and seeking sound advice can eliminate or minimise this nasty ‘death tax’.
Read part one here.
Note: This article is in no way intended to provide you with personal advice and you should discuss your own circumstances with your authorised financial adviser before committing to any decisions on matters raised in this article.