Who will get your superannuation and what might the tax implications be for the beneficiary?

Set out below are the general rules regarding superannuation beneficiaries as well as binding death benefit nominations and taxation considerations.

The General Rule

According to the Superannuation Industry (Supervision) Act 1993 (SIS Act), “death benefits” under a superannuation policy must be paid to the member’s dependants or to the member’s Legal Personal Representative.

The SIS Act defines a “dependant” as the spouse, child or any person with whom the member had an “interdependency relationship”.

A “child” includes 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 the superannuation death benefit, the trustee of the superannuation fund cannot pay the benefit to that person. Therefore, the general rule is that 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.

There is, however, an exception to “the general rule”: a binding death benefit nomination.

Binding Death Benefit Nomination (BDBN)

A BDBN is a direction to the superannuation fund’s trustee to pay the member’s death benefit to a nominated dependant or dependants of the member. These nominations are only valid and binding on the trustee for a continuous period of three years.

It is therefore possible for the member to compel the trustee to pay the death benefit as directed in the nomination, but note that the nominated beneficiaries cannot be outside the definition of “dependant” as defined in the SIS Act.

Taxation

Careful consideration should be given to the tax implications of your proposed BDBN. The tax implications on the beneficiary of the superannuation funds will depend upon the “taxable” and “tax-free” components of the superannuation contributions made to the fund during the member’s lifetime and to whom they are paid.

Death benefits paid to a tax-dependant will be entirely tax free, whereas 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 your spouse (or former spouse), a child aged under 18, any other person with whom you had an interdependency relationship just before you died, or any other person who was financially dependent on you just before your death. Generally, a death benefit paid to an adult child will be subject to tax of 16.5% as per (2) above (unless they were financially dependent upon you).

It is worth considering drawing your superannuation entitlements (tax-free) whilst you are still alive so as to avoid the incidence of the 16.5% tax component imposed under (1) above.  However, this could adversely impact on any pension entitlements you may have – you must consult your financial advisor and/or Centrelink.

It is crucial to determine the taxable and tax-free components of your superannuation contributions to ascertain the tax implications of the superannuation death benefit. This may affect what actions or planning should be considered as part of your estate planning.

Planning ahead

Consider a payment and re-contribution strategy.  This involves being paid member benefits (tax free) and then re-contributing non-concessional contributions. This may change the mix of benefits from taxable 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, if over age 65, they must be gainfully employed.

Lastly, set a reminder to yourself for every three years to update your BDBN, thus ensuring you retain some sort of influence on where your superannuation eventually ends up.