A superannuation death benefit is a payment to a dependent beneficiary or to the trustee of a deceased estate. The form of the payment and the recipient depend on the rules of the superannuation fund and the requirements of the Superannuation Industry (Supervision) Regulations 1994. Superannuation differs from other assets in that it does not automatically form part of a deceased estate.

Nominating a beneficiary

If a super fund’s rules allow, a person can nominate a beneficiary, and the nomination can be binding or non-binding. A beneficiary must fit the definition of “superannuation dependant”, including a spouse or de factor partner, a child of any age, or someone who was financially dependent on, or in an “interdependency relationship” with, the deceased at the time of their death. An interdependency relationship exists between two people who live together in a close personal relationship, where one relies on the other for domestic support, personal care or financial support.

If no nomination is made, a superannuation fund trustee may use their discretion to decide who should receive the payment, regardless of what is indicated in a will, or to make a payment to the deceased’s legal personal representative (the estate’s executor) to distribute the payment in accordance with the deceased’s will.

Binding nomination

For a binding nomination to be valid, it must be in writing, signed by the superannuation holder, and witnessed by two adults not mentioned in the nomination. The proportion payable to each beneficiary must be certain and beneficiaries must meet the definition of a superannuation dependant.

Some binding nominations can be indefinite and others must be renewed after 3 years. A binding nomination increases the likelihood of the benefit passing to an intended beneficiary. It also allows the superannuation death benefit to be paid faster and with less hassle than if payment of the benefit is left to a trustee’s discretion or it is directed to an estate.

A binding nomination can be challenged in circumstances such as where:

1. the fund trustee does not receive the nomination before the superannuation-holder’s death;
2. the beneficiary does not meet the definition of an eligible beneficiary;
3. the nomination was not made voluntarily;
4. the nomination process was not followed properly;
5. the superannuation holder made the nomination when they lacked mental or legal capacity.

Some superannuation funds do not allow members to make binding nominations, only non-binding ones.

Non-binding nomination

A non-binding nomination means a superannuation fund trustee will consider the nomination as an indication but has full discretion to pay the benefit to who they believe is the most appropriate beneficiary. This could be to an individual(s) or to an estate. Alternatively, the trustee can make a payment to the deceased’s legal personal representative to be distributed in accordance with the will.

If a dispute arises over who is to be a beneficiary, it may need to be resolved through the Australian Financial Complaints Authority or through the courts. If the superannuation death benefit is paid to an estate and the deceased’s will does not provide for it, or the deceased died without a will, the benefit may be distributed in accordance with the NSW intestacy laws.

Taxation of a superannuation death benefit

A beneficiary will usually receive the payment as a lump sum, but can choose to receive it as an income stream instead.

Tax payable on a superannuation death benefit depends on a range of factors, including:

1. whether the fund includes proceeds from insurance policies;
2. tax components of the interest;
3. whether the benefit is paid as an income stream or a lump sum;
4. the age of the deceased and the age of the beneficiary;
5. whether the beneficiary meets the definition of a “tax dependant”; and
6. whether the benefit is paid from a taxed or unpaid superannuation scheme.

The definition of an interdependency relationship is slightly different for taxation purposes to the definition for superannuation purposes. For taxation purposes, the definition of interdependency relationship applies to a former spouse or de facto, and to any person dependent on the deceased. The definition for taxation purposes extends to two people who have a close personal relationship but do not satisfy the other requirements because either or both of them suffer from a physical, psychiatric or intellectual disability.

No tax is payable on the tax-free component of super where is it received as an account-based income stream or a lump sum. Tax rates vary when the benefit is received as a capped defined benefit income stream.

A non-tax dependant can receive the benefit as a lump sum only and pays a marginal tax rate on the superannuation death benefit.

Tax returns

If a superannuation death benefit is received through a deceased estate, the estate will have paid tax on the beneficiary’s behalf, so the death benefit is not included as assessable income on a tax return.

If a superannuation death benefit is received directly from a superannuation fund, the fund will provide an income stream payment summary to show details such as the taxable and non-taxable components, and the withholding amount, to assist you to complete a tax return.

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