TechHub

Part 1: Who can be paid your superannuation on death?


There are two important questions that need to be answered when it comes to complying with the compulsory cashing requirements of a deceased member’s superannuation benefit:

1. Who can the superannuation death benefit be paid to?
2. How will the superannuation death benefit be taxed?

The answer to the first question can be found in the SIS legislation, whilst the answer to the second question resides in the Income Tax legislation. A reminder of the importance of these two questions is the common scenario of a deceased parent’s superannuation being paid to their adult child. The SIS legislation permits the benefit to be paid to the parent’s child, regardless of age, however, the taxable component of the superannuation death benefit will be assessable to them and taxed at either 15% (taxed element) or 30% (untaxed element).

This article focuses on who can be paid a superannuation death benefit. The taxation of superannuation death benefits will be covered in a separate technical article.

Requirement to pay a superannuation death benefit

A deceased member’s superannuation benefits must be cashed as soon as practicable after the member dies1. Further, the superannuation law restricts the cashing of a deceased member’s superannuation interest to either:

  • One or more dependants of the deceased member
  • The member’s Legal Personal Representative (LPR)
  • Another individual after the trustee has not, after making reasonable enquiries, found either an LPR, or a dependant of the deceased member2.

Who is your dependant?

A ‘dependant’ is defined in section 10 SIS Act as meaning:

“in relation to a person, includes the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.”

As the definition of ‘dependant’ is an inclusive one, it also covers a ‘dependant’ within the ordinary meaning of the word, including someone who is financially dependent on a person.

The terms ‘spouse’; ‘child’ and ‘interdependency relationship’ are also defined in section 10 SIS Act.

In relation to ‘spouse’, this includes married couples and, defacto relationships, whether of the same sex or different sex.

A ‘child’ includes a child of any age. For example, the 60-year-old son of an 85-year-old is still a ‘child’ for the purpose of an eligible recipient of the superannuation death benefit of the 85-year-old parent. Whether a child is under 18 is relevant for how the superannuation death benefit will be taxed, which we will discuss in a separate article.

Further, a ‘child’ includes an ‘adopted child’, as well as a ‘stepchild’. The term ‘stepchild’ is not defined in the SIS law and is therefore given its ordinary or ‘common law’ meaning, having regard to the context in which it appears. The step relationship can cease and thus the ‘stepchild’ will no longer be a ‘stepchild’ where the marriage of the stepchild’s natural parent to their stepparent ends, on death or divorce3. However, the former ‘stepchild’ may still qualify as a ‘dependant’ and eligible to be paid the superannuation death benefit of their stepparent where they meet the requirements of being in an interdependency relationship with the deceased or come under the ordinary meaning of ‘dependant’.

Example

Benjamin and Holly are married. Holly has a 12-year-old daughter, Faye, from a previous marriage. Benjamin would like part of his superannuation to be paid directly to Faye in the event of his death.

Faye is Benjamin’s stepchild for the purposes of the superannuation law and consequently is an eligible superannuation death benefit recipient. However, Faye ceases to be Benjamin’s stepchild when either of the following events occur, prior to Benjamin’s death:

  • Benjamin and Holly divorce; or
  • Holly, Faye’s natural parent, dies.

Let’s say Holly dies when Faye is aged 17 and still at school, living in the family home. Two years on, Benjamin unfortunately also dies. At the time of Benjamin’s death, Faye was still living at home and was a full-time uni-student. Whilst Faye will no longer qualify as a stepchild of Benjamin, she is most likely to be considered as being a ‘dependant’ of Benjamin for the purpose of being able to be paid his superannuation death benefit, either under the interdependency relationship option or under the ordinary definition of ‘dependant’.

In general, an interdependency relationship exists between two people if:

  • they have a close personal relationship
  • they live together
  • one or each of them provides the other with financial support and
  • one or each of them provides the other with domestic support and personal care.

An interdependency relationship may also exist where the two persons, who have a close personal relationship, are unable to satisfy the requirements due to either:

  • One or both of them suffering from a physical, intellectual or psychiatric disability; or
  • Temporarily living apart, e.g. due to one temporarily working overseas or being in gaol4.

When determining whether two persons have an interdependency relationship the SIS regulations outline matters to be taken into consideration5.

Paying to the deceased member’s LPR

Where a member wishes to leave their superannuation benefits to someone who is not a dependant under the super laws, benefits can be paid to their LPR – this is the Executor or Administrator of the deceased member’s estate. Where a deceased member’s superannuation in paid to the member’s deceased estate, it is generally distributed in accordance with their Will.

Example:

Theo wishes to leave his superannuation to his adult niece upon his death. Theo has a Will with his brother and sister as joint Executors. His niece does not satisfy the definition of ‘dependant’ under the SIS legislation and consequently the fund cannot pay Theo’s superannuation benefit, in the event of his death, directly to his niece.

To achieve Theo’s wish, his superannuation death benefit would need to be paid to his LPR, being the Executor of his estate and then distributed to his niece.

No dependant or LPR

The superannuation law permits the superannuation trustee(s) to pay a death benefit to a person who is not a ‘dependant’ of the deceased member, but only after the trustee(s) has not, after making reasonable enquiries, found either an LPR, or a dependant of the member.

The form of superannuation death benefits

A deceased member’s superannuation can be cashed in any one or more of the following forms:

  • In respect of each person to whom benefits are cashed:
    • A single lump sum; or
    • An interim lump sum and a final lump sum.
  • One or more pensions or the purchase of one or more annuities, payable to an eligible recipient6.

In relation to death benefits being cashed in the form of lump sums, it is often forgotten that it is restricted to an interim and final lump sum payment. However, this applies to each person to who benefits are cashed, for example, if there were three persons to whom the deceased member’s benefit were to be paid, this would allow an interim and final benefit payment for each person. Where the deceased member’s benefit was cashed in favour of their LPR, that is, paid to their estate, a maximum of two payments would be permitted.

In respect of cashing the death benefit in the form of a pension, where the member died on or after 1 July 2007, and their dependantwas a child of the deceased, there are restrictions that apply to the pension. A child cannot be paid a deceased member’s benefit in the form of a pension unless at the time of death of the member, they were:

  • Less than 18 years of age; or
  • Being 18 or more years of age:
    • Is financially dependent on the member and less than 25 years of age; or 
    • Has a disability of the kind described in subsection 8(1) of the Disability Services Act 19868.

Further, where the child was eligible to receive the death benefit in the form of a pension, it must be cashed as a lump sum on the earlier of:

  • the day on which the annuity or pension is commuted, or the term of the annuity or pension expires (unless the benefit is rolled over to commence a new annuity or pension); and
  • the day on which the child attains age 25.

However, this requirement does not apply where the child has a disability of the kind described in subsection 8(1) of the Disability Services Act 19869

Where the deceased member’s superannuation benefit is cashed in the form of a pension, commonly referred to as a “death benefit pension”, there will be transfer balance cap (TBC) considerations for the death benefit pension recipient10.

Compulsory cashing requirement and death benefit pensions

Cashing a deceased member’s superannuation benefits in the form of a pension (a “death benefit pension”) only satisfies the compulsory cashing requirement as long as the interest can continue to be cashed in that form. That is, the pension continues to be paid and it meets the relevant pension standards in the superannuation law11. This requirement means that:

  • Where a death benefit pension is commuted, either partially or in full, the resulting lump sum benefit payment must be paid out of the superannuation system. That is, the death benefit pension recipient cannot retain the commuted lump sum amount inside superannuation in an accumulation account;
  • Failure to meet the pension standards in the superannuation law, e.g., payment of the minimum pension, will be a breach of the compulsory cashing requirement.

Taxation of superannuation death benefits

Refer to our separate article “The tax treatment of superannuation death benefits” for how these benefits are assessed and taxed.

1. SIS regulation 6.21
2.SIS regulation 6.22
3.ATO ID 2011/77
4.Sectn 10A SIS Act
5.SIS Regulation 1.04AAAA
6.SIS sub-regulation 6.21(2)
7.Per the SIS defn of ‘dependant’
8.SIS sub-regulation 6.21(2A)(b)
9.SIS sub-regulation 6.21(2B)
10.Refer to LCR 2017/3: Superannuation death benefits and the transfer balance cap
11.LCR 2017/3, paragraphs 61 to 64


Related articles

25 May 2022

ATO’s clarification on benefit types a pandora’s box

The ATO has recently provided an update on their view of whether a payment will be treated as a superannuation member benefit or as a superannuation death benefit where a member dies after they have requested a benefit, but before the actual benefit payment by the superannuation fund¹. Whether a benefit payment is treated as…

16 Mar 2022

Part 2: The tax treatment of superannuation death benefits

In a previous technical article, we considered who could be paid a superannuation death benefit. This is determined under the superannuation law. We now turn to the income tax treatment of a superannuation death benefit.A superannuation death benefit could be received by a person either: Directly from a superannuation fund, where they meet the definition…

18 Feb 2022

Guide to home equity access scheme

Brought to you by Challenger Tech June, age 75, is single, retired and owns her home outright worth $600,000 She has a vacant block of land worth $400,000 and personal contents worth $10,000 She currently receives a fortnightly Age Pension entitlement of $549. The Home Equity Access Scheme (HEAS) provides support in the form of…