Tax on superannuation death benefits is determined by the tax components of your super balance, whether it is paid as a lump sum or income stream and your age, or the age of your nominated beneficiary.
On a balance of $500,000 at death, tax of up to $85,000 (including Medicare Levy) could be payable by your beneficiaires. But there are a number of simple ways to reduce death benefits tax.
Tax on Super Death Benefits
While a death benefit is usually paid as a lump sum to your nominated beneficiary, it is possible for it to be paid as an income stream, too. In both cases, the tax components of the balance will be the largest influence on how much tax is paid by your beneficiaries.
A superannuation balance can include one or more of the following tax components (aka elements):
- Tax-free component
- Taxable (taxed) component
- Taxable (untaxed) component
Each of these components are assessed differently for superannuation death benefits tax purposes, depending on how the payment is made (lump sum or income stream), the relationship of the beneficiary to you and your respective ages.
To avoid any doubt, the tax treatment of a superannuation death benefit is not based on whether you hold your super within an accumulation account or an income stream, but rather whether the recipient of your death benefit receives it as a lump sum or income stream. The tax treatment of your super accumulation or income stream (pension) balances are the same for death benefits tax purposes.
To find out the tax components of your super balance, you will need to contact your superannuation fund and ask them. Everyone’s super can have different ratios of tax components, based on the types of contributions made to the account and the investment earnings within the account.
If your super balance is in accumulation phase, the ratios of your tax components can change daily, due to earnings and contributions. If your super balance is in the pension phase, the ratios of your super balance will remain the same for the life of the pension.
Learn more: What Happens to Your Super When You Die?
Tax on Lump Sum Death Benefits
Death tax on superannuation paid as a lump sum is determined solely by the tax components that make up your balance. Neither your age, or the age of your nominated beneficiary will affect the tax payable.
The table below details the tax rates that apply to a death benefit paid as a lump sum.
|Tax Component||Received by Tax Dependant||Received by Non-Tax Dependant|
|Taxable (taxed)||0%||Lower of Marginal Tax Rate and 15% Plus Medicare|
|Taxable (untaxed)||0%||Lower of Marginal Tax Rate and 30% Plus Medicare|
Table 1: Tax on lump sum death benefits
Taxation of superannuation death benefits paid to an estate will generally not incur the Medicare Levy; whereas a death benefit paid directly from the superannuation fund to a beneficiary will.
Tax on Death Benefit Income Streams
The contributing factors of tax on a superannuation death benefit paid as an account based pension income stream will be calculated based on the tax components, as well as the relationship of your beneficiary to you and your respective ages, as detailed in the table below.
Account based pension received by a tax dependant
|Tax-free Component||Taxable (taxed) component||Taxable (untaxed) component|
|Beneficiary is 60 years or older OR deceased was 60 or older||0%||0%||Beneficiary's marginal tax rate (MTR), minus 10% tax offset|
|Beneficiary and deceased are both under age 60||0%||Beneficiary's marginal tax rate (MTR), minus 15% tax offset||Beneficiary's marginal tax rate (MTR)|
Table 2: Tax on income stream death benefits
Death Benefits Tax Examples
Let’s assume your super balance, whether in accumulation or pension phase, is $500,000 – consisting of $100,000 of tax-free elements and $400,000 of taxable (taxed) elements.
If paid as a lump to a spouse or child under 18, the tax would be:
($100,000 x 0%) + ($400,000 x 0%) = $0
If paid as a lump sum to a child 18 or over, the tax would be:
($100,000 x 0%) + ($400,000 x 15%) = $60,000 plus Medicare Levy of 2% ($8,000).
As you can see, the amount of death benefits tax payable by your beneficiaries can be quite significant.
A death benefit income stream can only be paid to a child if that child is:
- under 18;
- Between age 18 and 25 and was financially dependant on the deceased; or
- Is living with a permanent disability.
If a child is under age 25 and started receiving a death benefit as an income stream after 1 July 2007, the income stream must be stopped on or before the date of their 25th birthday and redeem the remaining pension value as a lump sum payment. The lump sum payment will be received tax free.
Super Death Benefits Tax Calculator
The calculator below allows you to calculate how much tax will be paid by a beneficiary of your super, when paid to them as a lump sum.
How to Reduce Superannuation Death Benefits Tax
There are a few ways to reduce or eliminate superannuation death benefits tax. Importantly, each of these strategies are highly complex and need to be implemented accurately to avoid errors, excessive tax, non-compliance with super laws and a myriad of other unintended consequences that can occur as a result of incorrect application. Professional advice is highly recommended.
A withdrawal and recontribution strategy is the process of withdrawing some or all of your superannuation balance and recontributing it back into superannuation as a non-concessional contribution. A non-concessional contribution will count towards the tax-free component of your super balance, effectively reducing or eliminating death benefits tax.
Managing Contributions and Income Streams
If you are at or nearing retirement and intending on making a large non-concessional contribution, downsizer contribution or small business CGT retirement contribution, you may consider commencing a retirement income stream with your current super balance (if eligible), then making the large contribution and starting a second income stream.
This will segregate your balances and the associated tax components, allowing one of your income streams to consist of 100% tax free components, without being contaminated by your taxable components.
Making Additional Non-Concessional Contributions
Making non-concessional contributions into superannuation will increase your tax-free components, as all non-concessional contributions count towards the tax-free components. Therefore, making non-concessional contributions can improve the tax-free/taxable ratio when you commence an income stream.
A partial or full withdrawal of your super will reduce or eliminate superannuation death benefits tax, because tax on super death benefits is only payable if you pass away with a residual super balance. If you die with a lower or no super balance, your beneficiaries will pay less or no tax.
It would generally be ideal to make such a withdrawal as close to your date of death as possible to continue to benefit from the tax concessions associated with super, yet avoiding death benefits tax. You should obviously be mindful of any tax on super withdrawals that may be payable as a result of the withdrawal and recontribution strategy, as this would likely negate the benefits of such a strategy.
The management of potential death benefits tax payable by your loved ones should begin as soon as possible. The earlier you begin planning this, the more strategic flexibility and options you will have available to you. As I mentioned, professional advice is highly recommended. If you would like to discuss ways to minimise death benefits tax as part of your overall retirement plan, click here.
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