For many Australians our superannuation often ends up as our second largest asset, right behind our home yet how many of us know what will happen to our superannuation when we die and just as importantly, how it will be taxed.
This guide will help you understand who you can leave your superannuation and what the tax consequences are and importantly what you can do to minimise tax on death benefits.
Who gets your superannuation when you die?
First of all it is important to note that superannuation is a non-estate asset. This means your super is not automatically included in your Will and you therefore need to separately consider who should receive your superannuation and this is done through providing your super fund’s trustee with a death benefit nomination.
Who can you nominate?
- Spouse
- Child
- Financial dependant
- Interdependent relation
- Legal personal representative (IE your Will)
How any death benefit is taxed will depend on whether or not your beneficiary is considered a tax dependant and what tax ‘components’ make up your superannuation.
For your superannuation nomination to be valid and completely tax free, you can only nominate:
- Your spouse
- Your child under age 18
- Someone you can prove you have an interdependent relationship with
Any other valid nomination can attract up to 30% tax plus Medicare levy. The below table provides a helpful summary.
| Recipient | Tax-free component | Taxable taxed element | Taxable untaxed element |
| Tax dependant | Tax-free | Tax-free | Tax-free |
| Non-tax dependant | Tax-free | Maximum 15% [1] | Maximum 30% [1] |
[1] where the lump sum death benefit is paid directly to a beneficiary but not via deceased estate then Medicare Levy is payable.
The problem for many people is that eventually they want to leave their superannuation death benefits to their adult children, commonly the case for a surviving spouse.
For most people, the majority of our superannuation is made up of ‘taxable taxed element’ because that is what our superannuation guarantee payments are.
So how can you make sure your beneficiaries get more your hard-earned wealth and the tax office gets less?
If you meet certain criteria such as being able to access your superannuation and your Total Super Balance is less than the Transfer Balance Cap of $1.9 million (from 01/07/2023) then you may be able to benefit from what‘s known as a ‘re-contribution strategy’.
This involves taking a withdrawal from your super, consisting of taxable and tax-free components and re-contributing those funds back into super as a tax-free non-concessional contribution.
Here’s an example. Let’s say John is aged 67 has $500,000 in superannuation that he wants to leave to his adult daughter when he dies. The majority of his super is part of the taxed element because his super was built through compulsory superannuation guarantee payments but he also made some tax-free non-concessional contributions when he retired to help boost super for retirement. Let’s assume his superannuation looks like this:
| Details | Before Re-contribution Strategy |
| Account Balance | $500,000 |
| Tax-free Component | $60,000 |
| Taxable Component [1] | $440,000 |
| Death benefit tax if left to non-dependant [2] | $74,800 |
[1] Assumes taxable taxed element
[2] tax rate calculated at 15% plus Medicare Levy
Due to superannuation contribution limits, John cannot simply withdraw and re-contribute his superannuation in full in one go but after enough cycles here is what his superannuation looks like:
| Details | Before Re-contribution Strategy |
| Account Balance | $500,000 |
| Tax-free Component | $500,000 |
| Taxable Component | $0 |
| Death benefit tax if left to non-dependant | $0 |
Note: we have ignored any income, capital growth, or additional withdrawals to keep a like-for-like comparison. It is also important to note that any withdrawal from superannuation must be proportioned across each component and you cannot select to only withdraw the taxable component from an account.
As a result of this strategy, John’s daughter will receive his full superannuation balance in the event of his death and the ATO gets nothing.
In summary
A comprehensive estate plan needs to ensure non-assets like superannuation have been considered, including any potential taxes and therefore it’s not uncommon for someone to need an estate lawyer and financial adviser that can work closely to help deliver optimal results across all assets and ensure your beneficiaries get as much of your wealth as possible.
Disclaimer
Any advice is of a general nature and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation, and needs. Please seek personal financial advice prior to acting on this information. This has been prepared and by Constellation Financial Planning Pty Ltd, a corporate authorised representative (CAR 1260791) of InterPrac Financial Planning Pty Ltd (AFSL 246638).
