When someone dies, their superannuation usually gets transferred to their beneficiary as superannuation death benefits. Depending on who the beneficiary is, the benefits may be taxed in some circumstances.
If you are a beneficiary, the amount of tax you pay depends on factors such as:
- If the benefit is paid as a lump sum or pension.
- Your age and the age of the deceased at the time of their death (for income streams).
- Whether the benefit is paid from an untaxed superannuation scheme or a taxed scheme.
- Whether you’re a dependent for tax purposes.
Someone who is tax-dependant will:
- A spouse of the deceased.
- An underage child of the deceased.
- Someone who was financially dependent on the deceased at the time of their death.
- Someone who was in an interdependency relationship of the deceased at the time of their death.
Lump sum payments
Lump sum super benefits paid to tax-dependant beneficiaries are not taxed, whereas those who are not tax-dependent will need to pay more tax and will only be able to receive the benefit as a lump sum. Not all super death benefits paid to a non-tax dependant are subject to tax. There are tax-free components that are made up of contributions after-tax that the member made to their super.
The taxed element (where the member paid tax in their super) of the taxable component of the benefit is subject to a maximum tax rate of 15% plus the Medicare levy. The untaxed element (where the death benefit is being paid from an untaxed super fund or includes proceeds from a life insurance policy held by the fund) of the taxable component of the benefit is subject to a maximum tax rate of 15% plus the Medicare levy.
Income stream payments
If the death benefit is paid in the form of an income stream, the tax treatment of the payment is dependent on the age of the deceased and beneficiary at the time.
If the deceased or the beneficiary is aged 60 or over at the time of the benefactor’s death and the super is paid from a taxed super fund, then the payment will not be taxed. If the age of the deceased and the age of the beneficiary are both under 60, the taxable portion of income stream payments will be treated as assessable income but will be entitled to a tax offset equal to 15% of the amount.