Paying superannuation death benefits

About superannuation death benefits

Generally, a superannuation death benefit is a payment you make to a dependent beneficiary or to the trustee of a deceased estate after the member has died. You should make this payment as soon as possible after the member's death.

The form of the benefit payment, and who it is paid to, will depend on the governing rules of your fund and the relevant requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR).

You can pay the deceased's dependants as either or both:

• a super income stream
• a lump sum.

You can pay the deceased's non-dependants:

• a lump sum.

Death benefit or member benefit

If a member requested an amount to be paid from their fund before they died, but died before they received it, it may be a member benefit in some limited cases. This is determined by the facts and circumstances surrounding the payment.

A trustee of a regulated super fund can only pay super benefits according to the governing rules of the fund, including the:

• fund’s trust deed
• relevant legislation.

The governing rules set out when benefits can be paid and who they can be paid to, including after a member’s death. The governing rules of the fund must be read carefully to determine a member’s benefit entitlements in the event of death.

At the time of payment, the trustee must assess whether it is a member or death benefit based on the facts known at the time, including:

• terms of the request from the member
• terms of the trust deed and any other governing rules
• knowledge at the time the payment is made (including whether they are aware that the member has died)
• the entity that the payment is being paid to
• circumstances and timing of the payment
• whether the payment is made because of and in line with the request made by the member.

For advice on specific circumstances, the executor or legal representative of a member's estate can apply for a private ruling.

Dependants

The definition of a dependant is slightly different for:

• who you can pay a death benefit to (superannuation law)
• how the death benefit will be taxed (taxation law).

Under superannuation law, a death benefit dependant includes:

• the deceased's spouse or de facto spouse
• a child of the deceased (any age)
• a person in an interdependency relationship with the deceased    
  • this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

Under taxation law, a death benefit dependant includes:

• the deceased's spouse or de facto spouse
• the deceased's former spouse or de facto spouse
• a child of the deceased under 18 years old
• a person financially dependent on the deceased
• a person in an interdependency relationship with the deceased.

Under taxation law, a person is included in the definition of a death benefit dependant if they receive a super lump sum because the deceased died in the line of duty. This will be as a member of:

• the defence force
• Australian Federal Police
• police force of a state or territory, or
• as a protective service officer.

Death benefit payments to foreign residents

If the recipient of the superannuation death benefit is a foreign resident for Australian tax purposes, they receive the same tax treatment as a resident. However, they are generally exempt from the Medicare levy.

The death benefit payment is considered Australian-sourced income. However, if the beneficiary is a tax resident of a country that has a double tax agreement with Australia, there may be no Australian tax imposed.

The beneficiary will need to check the taxation laws of their country and whether it has a tax treaty with AustraliaExternal Link.

Income stream death benefits

If you pay the death benefit as an income stream, the proportioning rule is used to calculate the tax-free and taxable components.

The proportion you calculate will continue to apply to all benefits paid from the income stream. This includes benefits arising from the commutation of the income stream.

If you are paying a death benefit income stream to a dependant child of the deceased member, unless the child has a permanent disability, you must:

• stop paying the income stream on or before the date the child turns 25 years old
• pay the remaining benefit as a tax-free lump sum.

Reversionary income stream death benefits

A super income stream will stop when the member who is receiving it dies. The exception is if your fund's governing rules specify that a dependant beneficiary is automatically entitled to receive the income stream.

If the deceased person was receiving an income stream benefit when they died, the proportioning rule is used if your fund's governing rules allow for a reversionary income stream to be paid. You must proportion the components of the beneficiary's reversionary income stream as you did for the deceased's benefit.

If the income stream stops, you will need to value the super interest and calculate the components before you make a death benefit payment.

Lump sum death benefits

If you pay a lump sum death benefit to a dependant, the whole amount is tax-free. This is the case whether the lump sum contains a taxed element or an untaxed element.

If you pay a lump sum death benefit to a non-dependant, you will need to calculate the tax-free and taxable components for each benefit paid. Calculate these components using the proportioning rule.

Lump sum death benefit paid by trustee

If a lump sum death benefit is paid by the trustee of a superannuation fund after the death of a fund member to the trustee of a deceased estate, the way it is taxed will depend on the status of those who benefit or are intended to benefit from the payment as either dependants of the deceased or non-dependants of the deceased.

All those who benefit are dependants of the deceased.

If you as the trustee of a deceased estate receive a lump sum death benefit and all of the beneficiaries that have benefitted or may be expected to benefit from the benefit are dependants of the deceased, the entire benefit will be tax free to the estate.

All those who benefit are not dependants of the deceased.

If all of the beneficiaries that have benefitted or may be expected to benefit from the lump sum death benefit are not dependants, you will be subject to tax on the taxable component of the benefit at the rates of 15% for the taxed element and 30% for any untaxed element. Any tax-free component will not be subject to tax.

There is a mix of dependants and non-dependants who benefit.

There is some complexity when those who have benefitted or are expected to benefit includes a mix of dependants and non-dependants of the deceased. In these cases, a proportionate approach to taxation is required. Note too that there is a proportioning rule that ensures that relevant components of a lump sum benefit can't be streamed to particular beneficiaries.

You must assess what part of the benefit was paid to or is expected to benefit each beneficiary proportionate to the total benefit. You must predicate your assessment on a reasonable view of the facts known at the time by 30 June of the year in which you receive the payment. This requires you to consider the nature and identity of each beneficiary, your level of knowledge at the time, as well as any other circumstances and timing pertaining to the payment.

Your assessment is to be made only in relation to the lump sum death benefit itself and not income earned from it. For example, if the benefit is paid to a testamentary trust created under a will, only capital entitlements, rather than income entitlements are to be considered. The proportionate approach only contemplates the benefit ultimately payable to the beneficiary or beneficiaries and therefore doesn't consider any part of it used to meet estate administration fees and costs.

This example demonstrates that applying the proportionate approach when you pay a lump sum death benefit doesn't mean that each asset class that comprises that estate must also be split into that exact proportion in funding the distributions.

The proportionate approach doesn't interfere with your estate management prerogatives nor the provisions of State-based Succession Acts; it merely requires an assessment of the extent to which a particular beneficiary has benefitted or is expected to benefit from the lump sum death benefit.

This example demonstrates that the proportionate approach doesn't interfere with the trustee’s ability to administer the estate where there are specific bequests.

Lump sum death benefits – tax deductions claimed on insurance premiums

The taxed and untaxed elements are calculated differently where you have claimed, or intend to claim, tax deductions for insurance premiums to provide for future death benefits for your members. The untaxed element of a lump sum death benefit paid to a non-dependant is increased to reflect the insurance component of the benefit – otherwise no tax would be paid on this component of the death benefit.

You must calculate the taxed element and the untaxed element of the benefit through a modified calculation:

• Work out the tax-free and taxable components of the member's super interest just before lump sum was paid.
• Apply these proportions to work out the tax-free and taxable components of the benefit using the general proportioning rule.
• The taxed element of the benefit is then calculated as follows:    
  • work out an amount by applying the formula:
    amount of super lump sum × service days / (service days + days to retirement)
  • reduce this amount (to no less than zero) by the tax-free component of the lump sum benefit (if any).

The result of this subtraction will be the taxed element of the benefit. The untaxed element of the benefit is equal to the taxable component of the benefit minus the taxed element of the benefit.

'Service days' for death benefits means the number of days in the service period for the lump sum. These are calculated to the date the deceased died.

'Days to retirement' means the number of days from the day the deceased died to the last retirement date. This is when their employment would have been terminated under contract or they would have turned 65 years old.

Step 1

Calculate the tax-free and taxable proportions of Marie’s super interest ($400,000) just before the benefit is paid:

• tax-free component of $100,000 = 25%
• taxable component of $300,000 = 75%.

Step 2

Apply these proportions to work out the tax-free and taxable component of Tim’s lump sum death benefit as follows:

• $280,000 × 25% = $70,000 tax-free component
• $280,000 × 75% = $210,000 taxable component.

Step 3

Calculate the taxed element as follows.

Work out an amount by applying the following formula:

1. amount of super lump sum × service days / (service days + days to retirement).

2. Reduce this amount by the tax-free component of the lump sum benefit (if any).

Step 4

Work out the untaxed element by taking away the taxed element from the taxable component of the benefit.

The lump sum death benefit consists of the following components:

• tax-free component = $70,000
• taxable component = $210,000 (comprising the taxed element ($189,472) and the untaxed element ($20,528)).

Commutation lump sum death benefits

If the deceased was receiving an income stream when they died and the income stream is commuted to pay a lump sum to a beneficiary, the proportioning rule is used. The components of the lump sum benefit must be proportioned as they were for the income stream.

Anti-detriment payment (tax saving amount)

From 1 July 2017, funds may only include an anti-detriment payment as part of a death benefit if the member died on or before 30 June 2017. The fund must make this payment by 30 June 2019. From 1 July 2019, no anti-detriment payment will be available for funds members, regardless of when the member has died. The government removed this provision to ensure consistent treatment of lump sum death benefits across all super funds.

An anti-detriment payment is an additional lump sum amount that may be paid to an eligible dependant when a lump sum death benefit is paid. The payment represents a refund of the 15% contributions tax paid by the deceased member over their lifetime.

The payment is only payable where the death benefit is being paid as a lump sum to an eligible dependant of the deceased member, who is either a:

• spouse or former spouse
• child (including an adult child)
• trustee of the deceased estate.

The governing rules of the fund will determine if an anti-detriment payment is paid. There is no legal requirement to make the payment. If a fund does pay an anti-detriment payment, the trustee can claim an income tax deduction in the financial year in which the lump sum is paid.

A pro rata deduction is available when only part of the death benefit is paid to an eligible dependant or only part is paid as a lump sum. If the lump sum payment is made through the estate of the deceased member, the amount of the deduction depends on the extent to which an eligible dependant is expected to benefit from the estate.

For example, if 70% of the death benefit is paid to the member's spouse and 30% is paid to the member's brother, claim a tax deduction for the anti-detriment amount paid. This is 70% of the calculated amount.

A trustee of a fund must make sure that they have sufficient funds available to make the payment. The funds must be separate from the member's super interest. They could be sourced from earnings held in reserve or proceeds of an insurance policy.

If a reserve is being used to source the extra payment, it is important to note that an allocation from the reserve could be a concessional contribution. This could count against the deceased member's concessional contribution cap for excess contribution tax purposes.

Where the death benefit is paid to a spouse, former spouse or a dependent child, the whole amount including the anti-detriment payment is tax-free.

Where the death benefit is paid to a non-dependent child, the anti-detriment payment is included in the taxable component, taxed element.

• For more information see ATO ID 2012/10 Income Tax: anti detriment payments paid by a complying superannuation fund to a trustee of a deceased estate
• ATO ID 2010/5 Complying superannuation fund: deduction for increased amount of superannuation lump sum death benefit