What Happens to My Superannuation When I Die?

Super and Binding Death Nominations

When a person passes away, their superannuation is distributed by their super fund company.  Superannuation is managed as a trust. It is therefore treated differently from your other assets like your money or property.  This means that your superannuation doesn’t automatically get distributed in accordance with your will once you pass away.  

Instead, often a superannuation company has the flexibility (unless otherwise instructed) to decide what happens with your superannuation.  They can choose to pay the money as a lump sum to your estate (which is normally what happens).  These funds would then be distributed via your will.  

Alternatively, your superannuation company can also choose to continue to manage your superannuation funds for your next of kin (e.g. partner or children) or to pay them a lump sum directly.  If they elect to continue to manage the superannuation, then this means that your immediate family members would effectively takeover as the new beneficiary of the super fund in the place of the person who has passed away. 

There is a significant difference between these two approaches. If your will is attempting to give your superannuation to persons who aren’t your immediate family members, then it is important that you give clear directions to your superannuation company as to what you would like them to do with your superannuation. 


Types of Directions 

There are three different types of direction that a person can give to their superannuation company. These are:

  • Lapsing binding death benefit nominations;
  • Non-lapsing binding death benefit nominations; and
  • Non-binding nominations. 

A binding death benefit nomination is an instruction from the nominee to their superannuation that the superannuation company needs to follow.   A lapsing binding death benefit nomination needs to be renewed by a person once every three years.  This is designed to ensure that the nomination stays up to date if a person’s personal circumstances change.   A non-lapsing binding death benefit nomination doesn’t need to be renewed every three years. 

The non-binding nominations allow the superannuation company to have the final say on who will receive the superannuation funds but allows for the nominee’s wishes to be considered. 


Tax Implications

There are different ways to gift your super which have different tax implications. Working out which tax rate applies can be confusing. It depends upon whether your nominated beneficiaries are considered dependents under both superannuation and taxation law.

A tax dependent includes:

  • Current and former spouses and de facto partners
  • Any children who are under the age of 18
  • Any other financial dependants

A superannuation dependent includes:

  • Your spouse or de facto partner
  • A child of any age
  • A person in an interdependency relationship


Superannuation Taxation Rates

A tax dependent can receive a death benefit as a lump sum without incurring any tax.  It doesn’t matter if they receive this money from a person’s will or directly from the superannuation company. 

A lump sum paid to a non-tax dependent can sometimes be taxable depending upon the type of superannuation that the deceased person had.  Where the super fund has already paid tax (the taxed element) this can be subject to a maximum rate of 15%.  Where the super fund has not already paid tax on the super (the untaxed element) this can be subject to a maximum tax rate of 30%. Each super fund will need to determine these elements before paying benefits. 

Alternatively, tax dependents can also receive a death benefit as an income stream (also called a reversionary pension). This is where the money is withdrawn as small regular payments over a long period of time. The tax rate depends on the age of the deceased and/or the age of the beneficiary. If you or the beneficiary were 60 over at the time of your death, it is generally paid tax free. If you are both under 60, the taxable portion of the income stream payment is counted as the beneficiary’s assessable income, but they may be entitled to a tax offset equal to 15% of this amount.


Self-managed Super Funds

Self-managed super funds are slightly different and can be quite complex. The requirements for a valid nomination depend on the trust deed requirements. It is important your nomination complies with the rules of the fund or it may be invalid. Like other super funds, self-managed super funds can pay lump sums to tax dependents tax free. If the benefit is paid to a non-tax dependent or as an income stream, the taxed and untaxed elements of the benefit will need to be determined to calculate the applicable tax. 

If you have a question about superannuation tax rates or any other legal issue, contact us today to speak with one of our experienced lawyers.


DISCLAIMER: The information contained in this article is general and is not intended to be advice on any matter. It is for information only and is not legal advice. In the event of a legal problem, you should seek legal advice.

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