Understanding Tax Implications for Superannuation Death Benefits

When it comes to superannuation death benefits, understanding the taxation implications is crucial. Whether a lump sum death benefit is taxable depends on various factors, including the components of the benefit and whether it is paid to a tax-dependent individual or not. In this comprehensive guide, we’ll break down the taxation rules for both tax-dependent and non-tax-dependent beneficiaries.

Taxation for Tax-Dependent Beneficiaries

Lump Sum Payment to Tax Dependents: If a lump sum death benefit is paid to a tax-dependent, such as a spouse or minor child, it is typically tax-free. In this case:

• The super fund is not required to withhold any tax.
• The beneficiary receives the death benefit tax-free, and no payment summary is provided by the superannuation fund.

Payment to an Estate with Tax-Dependent Beneficiary: When a death benefit is paid to an estate, and the ultimate beneficiary is a tax-dependent, no tax applies. However:

• The superannuation fund must still prepare a payment summary for the executor.

Payment to an Estate with Non-Tax-Dependent Beneficiaries: If an estate includes non-tax-dependent beneficiaries, tax will be applicable at the estate level. In this scenario, the tax treatment depends on the components of the benefit.

• If all beneficiaries are tax-dependents, the estate remains tax-free.
• If non-tax-dependent beneficiaries are part of the estate, tax will be levied at the estate level.

In both cases, the amounts received by tax-dependent beneficiaries are considered non-assessable non-exempt (NANE) income, which does not impact their tax position or benefits like Family Payments and Child Support.

Taxation for Non-Tax-Dependent Beneficiaries

Lump Sum Payment to Non-Tax Dependents: When a death benefit lump sum is paid to a non-tax-dependent, such as an adult child, taxation rules differ:

• The super fund is required to withhold tax on any taxable component (taxed and untaxed).
• Withholding rates are 15% plus the Medicare levy for taxed elements and 30% plus the Medicare levy for untaxed elements.
• The tax-free component remains tax-free, with no withholding requirements.
• The super fund provides the beneficiary with a payment summary.
• The beneficiary includes taxable elements in their individual tax return and may receive a refund if their tax payable is lower than the withholding amount.

Maximum Tax Rates for Lump Sum Payments to Non-Dependants:

• Taxed element of the benefit: Maximum 15% plus Medicare levy.
• Untaxed element of the benefit: Maximum 30% plus Medicare levy.
• Medicare levy applies when the payment goes directly from the super fund to a non-dependent beneficiary.

For detailed withholding requirements, refer to the tax table for superannuation lump sums on the ATO page.

Taxation for Payments to an Estate:

• Super funds do not withhold tax when payments are made to an estate.
• The super fund prepares a payment summary for the executor, who is responsible for paying tax at the above maximum rates (Medicare levy does not apply).
• Beneficiaries receive the net proceeds and are not required to include this amount on their tax return.

Calculating the Untaxed Element

Insurance-Based Death Benefits: If a lump sum death benefit includes an untaxed element, it may be sourced wholly or partly from insurance proceeds, resulting in tax implications. Here’s how to calculate the untaxed element:

• Untaxed Element = Taxable Component – Taxed Element
• Taxed Element = (Amount of Lump Sum Super Death Benefit × Service Days) / (Service Days + Days to Retirement) – Tax-Free Component

Where:

• Days to Retirement: Number of days between the date of death and the deceased’s last retirement date (usually age 65).
• Service Days: Number of days from the day the member joined the fund or the earlier service period start date (if a rollover amount was received) to the date of death.

Death Benefit Income Stream Taxation

For Dependants:

• If a death benefit income stream is paid to a dependant, no tax is payable, regardless of the inclusion of an untaxed element.

For Beneficiaries and Deceased Under 60:

• Tax rates vary for taxable components (taxed and untaxed).
• Offset and withholding rules apply.

For Retirement Phase Earnings:

• Death benefit income streams are considered in the retirement phase, resulting in exempt current pension income (ECPI).
• No PAYG obligations or payment summaries are required when either the deceased or surviving spouse is over 60.

Understanding the taxation implications of superannuation death benefits is essential for both tax-dependent and non-tax-dependent beneficiaries. Whether you’re receiving a lump sum or an income stream, knowing the rules and rates can help you make informed decisions about your finances. Please consult a tax professional, such as iCare Super, for personalized advice based on your specific situation.