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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 of ‘dependant’ under the superannuation law, as previously outlined; or
  • Via the deceased member’s estate as a beneficiary under the deceased member’s Will;
  • From the Administrator of the deceased member’s estate in accordance with the intestate laws of the relevant state or territory;
  • Directly from a superannuation fund where the fund trustee(s) has not been able to locate any dependants of the deceased member or their legal personal representative (LPR).

Regardless of the superannuation death benefit pathway, the tax treatment will be the same1.

Taxation of superannuation death benefits

How a superannuation death benefit is taxed is determined under the Income Tax Assessment Act 1997 (ITAA 97) and will depend upon:

  • The tax components of the superannuation death benefit;
  • Whether the recipient is a ‘death benefit dependant’;
  • Whether the superannuation death benefit was paid as a lump sum or as an income stream (pension).

Tax components of a superannuation death benefit

Similar to a member superannuation benefit, there can be up to two components of a superannuation death benefit, being the:

  • Tax-free component; and the
  • Taxable component.

However, the taxable component may be split into two further elements, being:

  • Taxed element; and the
  • Untaxed element.

From an SMSF perspective, the taxable component a superannuation death benefit will include an untaxed element only where it:

  • is paid as a lump sum benefit; and
  • is paid to a person who is not a ‘death benefit dependant’; and
  • the fund had claimed or will claim a deduction for the cost of the insurance2.

Generally, this will be the case where a member has life insurance cover within the fund, but does not have a beneficiary who would qualify as a ‘death benefit dependant’, for example, an adult child. Given the income tax implications of such a superannuation death benefit, consideration may need to be given to whether it is beneficial to continue to hold life insurance cover within superannuation or to hold it outside of superannuation. Relevant advice on this issue, from an appropriately qualified and licensed adviser, should also be considered.

Who is a ‘death benefit dependant’?

Determining whether the recipient of a superannuation death benefit is a ‘death benefit dependant’ is important as where the recipient is a ‘death benefit dependant’ they will:

  • not be assessed on a lump sum superannuation death benefit, regardless of their age;
  • not be assessed on payments from a superannuation death benefit pension, provided either the deceased or the ‘death benefit dependant’ was aged at least 60 at the time of the member’s death3.

Under taxation law, a death benefit dependant4 includes:

  • the deceased’s spouse or former spouse;
  • a child of the deceased under 18 years of age;
  • a person with whom the deceased had an interdependency relationship just before their death;
  • Any other person who was dependant on the deceased just before their death

A person is also 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, the Australian Federal Police or the police force of a state or territory, or as a protective service officer.

When considering the types of death benefit dependants it’s important not to refer to the definitions under the superannuation law. The relevant definitions are those under the ITAA 1997 and must be used to ascertain if the superannuation death benefit recipient qualifies as a ‘death benefit recipient’.

The three main differences in the definition of ‘dependant’ under superannuation law and the definition of ‘death benefit dependant’ under tax law are:

1 Tax law includes a deceased member’s former spouse. Whilst it is thought that this was to merely reference the fact that once a person dies, any marriage they were in ceases and consequently their spouse becomes their former spouse, it is generally accepted that the term also includes ex-spouses. For a member to affect the payment of part or all of their superannuation to an ex-spouse, the superannuation death benefit would have to be paid first to the deceased member’s legal personal representative (LPR) and then distributed by the LPR to the ex-spouse, subject to the provisions of the deceased member’s Will. The superannuation fund could not pay the death benefit directly to the ex-spouse as they are not a ‘dependant’ under the superannuation law.
 2 Tax law only includes a child under the age of 18 as a ‘death benefit dependant’. This means that whilst a superannuation fund can pay a deceased member’s benefit to their adult child, there will potentially be income tax levied on the benefit payment, unless they qualify as a ‘death benefit dependant’ under the interdependency relationship or financial dependant option.
 3  The superannuation law does not include in the definition of ‘dependant’ a person who receives a super lump sum because the deceased died in the line of duty. This will be as a member of the defence force, the Australian Federal Police or the police force of a state or territory, or as a protective service officer. Consequently, where a deceased member’s superannuation benefit is to be paid to such a person and they do not meet the definition of ‘dependant’ under the superannuation law, it will have to be paid via the deceased member’s estate.

Interdependency relationship

In all material respects the definition of interdependency relationship is the same under both the superannuation and tax law. In relation to the taxation determination of an interdependency relationship, there have been a number of Private Binding Rulings (PBRs) issued, which can be searched on the ATO’s legal database.

The ATO has also issued an Interpretative Decision (ID) 2014/22 on the issue of whether a taxpayer, who is a child beneficiary over 18 years of age can be a ‘death benefits dependent’ of the deceased due to having given up work to care for their terminally ill parent and received no financial support from anyone, other than the parent, during that time.

Where the interdependency relationship definition is being relied upon for the purpose of payment of the death benefit and/or the superannuation death benefit being exempt from tax, consideration should be given to obtaining specialist legal advice on the matter, including whether an application for a PBR should be submitted to the ATO.

Financial dependant

A ‘death benefit dependant’ also includes “any other person who was dependant on the deceased person just before he or she died”5, commonly referred to as a “financial dependant”.

The ATO stated in its Interpretative Decision (ATO ID) 2014/6 that “dependency involves substantial financial support or maintenance”. This ID addressed the issue of whether a child who received a superannuation death benefit from their parent’s superannuation fund, after the parent’s death, was a dependant for income tax purposes. If so, the superannuation death benefit would be received tax-free.

The child was over 18 years old at the time of receiving the superannuation death benefit, was living at home with the parent until the parent’s death and receiving Youth Allowance payments from Centrelink. The Youth Allowance payments the child received were calculated at a lower ‘at home’ rate as opposed to the higher ‘independent’ rate. This indicated, to the ATO, that they were substantially financially dependent upon their parent. A comparison of the level of financial support provided by the parent with that provided by the Youth Allowance payments also indicated that the child was financially dependent.

Consequently, on the facts given, the child, whilst over age 18, was determined to be a ‘death benefit dependant’ for income tax purposes as they were considered financially dependent upon the parent just before the parent’s death. The superannuation death benefit was received tax-free.

Further, on their website (QC 37785) the ATO states that “Financially dependent on the deceased means you relied on them for necessary financial support”. Debate often arises over what is “necessary financial support” – does it relate to the necessities of life or is it more akin to a “normal standard of living”. For example, grandparents providing regular payments to their adult children to fund private school fees of their grandchildren. Does this make the parents of the grandchildren financially dependent on the grandparents? Would it be considered “necessary financial support”? The regular financial support from the grandparents may be necessary to keep the grandkids at the private school, but not to ensure they can attend a school.

There is no clear cut template for ensuring that a recipient of a superannuation death benefit will be regarded as a “financial dependant”. This is further evidenced by the number of PBRs and cases on this issue. Financial dependency cannot be established simply by putting in place a document to say such financially dependency exits and then arrange a regular support payment. Particularly as the test for financial dependency is made “just before he or she died”.

Ultimately, whether a recipient of a superannuation death benefit is regarded as being financially dependent upon the member just before they died, will be dependent on the facts of each case and consequently it is important to retain relevant documentation to support such a claim. Such documentation would also be important where specialist legal advice is sought; where an application for a PBR is submitted to the ATO, or where the ATO may challenge the status of the superannuation death benefit as a ‘death benefit dependant’.

The tax amount

The following is a summary of the tax applicable to a superannuation death benefit paid:

Tax on superannuation lump sum payments made on death6

Taxable componentTaxed elementUntaxed element 
 Paid to ‘death benefit dependant70%0%
Paid to non-death benefit dependant15%30%
Tax-free component0%

Tax on superannuation death benefit income streams8

 Taxable componentTaxed element Untaxed element9
Beneficiary or deceased 60+ at time of death 0%10MTR less 10% tax offset10
Beneficiary and deceased less than age 60 at time of deathMTR less 15% tax offset11 MTR12
Tax-free component0%

PAYG withholding

An SMSF trustee may have PAYG withholding obligations when it pays a superannuation death benefit. These obligations will include requirements to:

  • Register as a PAYG withholder;
  • Withhold and remit the relevant amount to the ATO;
  • Provide relevant reports to the superannuation death benefit recipient and the ATO.

Whist an SMSF may have an obligation to register and report, they may not have a requirement to withhold and remit.

The following table is a summary of the PAYG Withholding requirements and obligations for an SMSF when making a superannuation death benefit payment.

RowSIS Act s.10 dependant typeIs the SIS dependant a Tax dependant per s.302-195? Form of death benefit optionsPAYGW registration required? PAYGW obligations >$0? PAYGW Reporting obligations? 
1SpouseYesLump sum PensionNo 
Conditional1
No 
Conditional1
No 
Conditional1
2Child < age 18YesLump sum PensionNo 
Conditional2
No 
Conditional2
No 
Conditional2
3Financially dependent child < age 25NoLump sum PensionYes 
Conditional2
Yes
Conditional2
Yes 
Conditional2
4Child who has a disability irrespective of ageYes3Lump sum PensionConditional4
Conditional1
Conditional4
Conditional1
Conditional4
Conditional1
5Child 18+ (does not qualify for rows 2-3)NoLump sum PensionYesYesYes
6A person who was in an interdependency relationship with the deceasedYesLump sum PensionNo 
Conditional1
No 
Conditional1
No 
Conditional1
7A person who was financially dependent on the deceasedYes4Lump sum PensionNo 
Conditional1
No 
Conditional1
No 
Conditional1
8Legal Personal Representative (LPR) – EstateN/ALump sum PensionYesNoYes

Notes:

1PAYG Withholding obligations will be dependent upon whether the member or death benefit pension recipient was aged at least 60 at the time of death of the member. If either were aged at least 60, there are no PAYG Withholding obligations;
2PAYG Withholding obligations will be dependent upon whether the member was at least age 60 at the time of their death. If the member was aged at least 60 at the time of their death, there is no PAYG Withholding obligations. A child death benefit pension must be fully commuted prior to their 25th birthday unless they have a disability of the kind described in subsection 8(1) of the Disability Services Act 1986;
3It is assumed that a child who has a disability of the kind described in subsection 8(1) of the Disability Services Act 1986, regardless of age. They would generally satisfy the definition of being a ‘death benefits dependant’ in section 302-195 ITAA 1997, either due to having had an interdependency relationship with the deceased or being financially dependent upon the member’s at the time of their member’s death. However, if they do not qualify as a ‘death benefits dependant’, you can apply row 5 applicable for a child aged at least but does not qualify for any of the previous three rows (2-4);
4For the purposes of this summary table, it is assumed that the death benefit recipient satisfies the ATO’s view and consequently satisfies the definition of ‘death benefits dependant’ per section 302-195 ITAA 1997.

Disclosure of a superannuation death benefit payment

How a superannuation death benefit is disclosed for tax purposes, will depend upon whether it was paid to the recipient directly from the superannuation fund or was received via the deceased member’s estate and is summarised as follows:

Death benefit receivedRecipient = ‘death benefit dependant’Recipient ≠ ‘death benefit recipient’
Direct from the superannuation fundNo disclosure requirements* Included in recipient’s personal tax return.
* PAYG Summary Statement issued with relevant details.
* PAYGW amount should offset personal tax liability for benefit payment.
Via deceased member’s estateNo disclosure requirements1*Included in tax return of the Estate.
* PAYG Summary Statement issued to Executor with relevant details.
* No PAYGW amount.
* Executor to set aside amount to pay tax liability of benefit payment as part of tax assessment issued to Estate.
* Net benefit amount paid to beneficiary → not disclosed in beneficiary’s tax return. 

Notes:

1 This is based on the beneficiary of the deceased estate who receives the superannuation death benefit being a ‘death benefit dependant’. Where the superannuation death benefit will be distributed from the estate across a number of beneficiaries, some of whom are a ‘death benefit dependant’ and some not, the Executor will exclude from the estate’s return the portion of the superannuation death benefit that will be distributed to a ‘death benefit dependant’.

1.Except that the Medicare levy will not apply to an assessable superannuation death benefit received via a deceased member’s estate.
2.Sectn 307-290 ITAA 1997
3.Sectn 302-60 ITAA 1997
4.S.302-195 ITAA 1997
5.Sub-sectn 302-195(1)(d) ITAA 1997
6.Medicare levy of 2% is added to rates except where the tax rate is nil. Medicare levy does not apply where superannuation death benefit paid via deceased member’s estate.
7.Per sectn 302-195 ITAA 1997.
8.Medicare levy of 2% is added to rates except where tax rate is nil.
9.As noted in this technical article, it would be unlikely that a superannuation death benefit income stream would include an untaxed element. This generally applies to a superannuation income stream paid from an untaxed source, e.g., constitutionally protected fund.
10.Subject to additional tax rules for excess capped defined benefit income streams.
11.Becomes tax-free when beneficiary turns 60, subject to additional tax rules for excess defined benefit income streams.
12.Tax offset of 10% becomes available when beneficiary turns age 60, subject to additional tax rules for excess capped defined benefit income streams.


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