Written by Aaron Alson
I am writing this article as a reminder for members to double check their death nominations on their superannuation accounts. There could be serious tax or legal consequences if you don’t!! Hudson have highlighted this topic many times over the years, however for the average everyday person, reviewing their estate isn’t something that makes it high on the bucket list when lying-in bed at night (hence why Hudson write these articles as reminders 😊).
In the last couple of months, I have come across the following scenarios with different clients.
- No nomination recorded.
- Ex-spouse nominated (unbeknown to the client)
- A child was missing from a nomination.
Death benefit payments
A super death benefit is a payment made upon the death of the member of a superannuation fund to one or more of the member’s dependants or legal personal representative.
Super not part of an estate
Super does not automatically form part of a person’s estate. A member can, however, elect to include their super death benefit in their estate by completing a binding or non-lapsing death nomination to their Legal Personal Representative (LPR). This way their superannuation death benefit will be paid in accordance with their will.
Who can be paid a super death benefit
- The members legal personal representative OR
- One of more of the member’s dependants.
Who is a dependant?
A spouse includes the person at death to whom the member was married, or with whom the member was living with on a genuine domestic basis in a relationship as a couple, or in a relationship registered under a law of a state or territory.
Former spouses are dependants for tax purposes but not for SIS purposes.
This includes any person regardless of age, who at the member’s death was the member’s natural, step, adopted, exp-nuptial or current spouse’s child. A dependant for tax purposes does not include a child aged 18 or over, unless the adult child was financially dependant of the deceased parent or was in an interdependent relationship with the decease partner.
John (65) and Mary (64) have recently updated their binding nominations and nominate each other as 100% beneficiaries on their respective super funds. Mary passes away and John receives 100% of her super benefit. After Mary’s death John amends his existing superannuation nominations and nominates 50% to his son Steve (35) and 50% to Mary’s daughter Hannah (45) from Mary’s previous marriage. Hannah considers John to be her father, however John never legally adopted Hannah because Hannah is still in contact with her biological father.
John dies 12 months later with $1.5 million in super. The trustee of the super fund determines that Hannah is not a dependant for super purposes and therefore not a valid nominee, because Hannah ceased to be John’s stepchild when Mary died. The trustee therefore determines to pay 100% of the benefit to Steve as he is still a valid recipient. Hannah will not receive the money that she thought she was entitled to.
For both SIS and tax purposes, a dependant includes any person who was financially dependant on the member at the time of the member’s death. From a SIS perspective, a potential beneficiary may qualify if they were receiving financial support at the time of death. However, from an ATO perspective, financial support that merely supplements a beneficiary’s’ income and improves their quality of life would not qualify the beneficiary as a financial dependant (this is extremely relevant for members who nominate adult children as they may fail to qualify for a tax-free death benefit for tax purposes).
An interdependent relationship between two people is characterised by:
- A close personal relationship
- Living together
- Financial support
- Domestic support
- Personal care of a type and quality above the care and support that might be provided a friend or flatmate.
Taxation of superannuation lump sum death benefits
The tax-free component of any lump sum death benefit payment is tax free. The tax treatment of any taxable component depends on whether the recipient is a tax death benefits dependant and whether the taxable component consists of a taxed or untaxed element.
Larry (72) has $1 million in super (100% taxable) and nominates 50% to his wife Natasha (69) and 50% to his adult son Harry (41) who is financially independent. Upon John’s death Natasha receives her lump sum death benefit tax free. To Harry’s surprise he now has an $85 000 in tax bill ($500 000 x 17%).
- Review your death nominations in super as soon as possible.
- Remember, super does not form part of an estate.
- There are implications if you do not nominate a dependant for superannuation and tax purposes. If you have a nomination that does not fit the category of a tax or financial dependant (i.e child over 18 or brother, sister, uncle, auntie etc) it may be best to seek legal advice/consult your solicitor for further guidance.