Superannuation

DEATH BENEFITS

On a member’s death, the trustee of the superfund is required to pay the deceased member’s benefits to their dependent(s) or Legal Personal Representative as soon as practical, either as a pension or as an interim and final lump sum. The death benefits of a deceased member cannot be retained as an accumulation amount within the fund.

There are two different types of dependents: Dependents under the Superannuation Industry (Supervision) Act 1993 and Tax Dependents under the Income Tax Assessment Act 1997.

The SISA dependents are basically persons who can be paid the deceased’s benefits directly from the fund. Dependents under the ITAA 1997can receive the deceased’s benefits tax-free or in the form of a pension. The main difference between the two types is that SISA includes adult children as dependents, whereas the ITAA 1997 only includes a child under the age of 18years, a child under 25 who is financially dependent, or a child who has a serious disability.

DEPENDENTS

SISA Dependents include:

A spouse
A person in an interdependency relationship
A financial dependent
Any child of the person (including stepchildren and adopted children).

TAXING OF DEATH BENEFITS

If you review your superfund statement, you may see that your balance is split into categories of TAX FREE, TAXABLE, and, in some cases, UNTAXED.

These categories are not important where the member’s benefits go to a Tax Death Dependent. However, where the benefits go to a SISA dependent who is not a Tax Dependent, there will be tax to be paid. The Tax-Free component is tax-free to the SISA dependent; the Taxable component is taxed at either 15% or 17.5%; and the Untaxed component is taxed at 30%.

This is often referred to as the death tax on superannuation.

PRE-DEATH WITHDRAWALS

It is becoming more common for people who have a terminal illness and have a large taxable balance in the superfund and do not have tax dependents (commonly a widow, widower, or single person) to withdraw their entire superfund balance so that the beneficiaries of their estate/super do not pay the 15%/17% tax.

This shouldn’t be left to the last minute, as the ATO is becoming very aware of schemes to carry out the cashing even after the person has died.