A superannuation death benefit is a payment made by a super fund to a dependent beneficiary or to the trustee of a deceased estate after the member has died.
The trustee of the super fund should make this payment as soon as possible after the member’s death.
The form of the benefit payment, and who it is paid to, will depend on the governing rules of your fund and the relevant requirements of the Superannuation Industry (Supervision) Regulations 1994 (SISR).
The deceased’s dependants can be paid as either or both of a super income stream and/or a lump sum.
The deceased’s non-dependants can only be paid as a lump sum.
Dependants
The definition of a dependant is slightly different for:
- who you can pay a death benefit to (superannuation law)
- how the death benefit will be taxed (taxation law).
Under superannuation law, a death benefit dependant includes:
- the deceased’s spouse or de facto spouse
- a child of the deceased (any age)
- a person in an interdependency relationship with the deceased – this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.
Under taxation law, a death benefit dependant includes:
- the deceased’s spouse or de facto spouse;
- the deceased’s former spouse or de facto spouse;
- a child of the deceased under 18 years old;
- a person financially dependent on the deceased;
- a person in an interdependency relationship with the deceased.
Under taxation law, a person is included in the definition of a death benefit dependant if they receive a super lump sum because the deceased died in the line of duty.
This will be as a member of the defence force, the Australian Federal Police or the police force of a state or territory, or as a protective service officer.
Death benefit payments to foreign residents
If the recipient of the superannuation death benefit is a foreign resident for Australian tax purposes, they receive the same tax treatment as a resident. However, they are generally exempt from the Medicare levy.
The death benefit payment is considered Australian-sourced income. However, if the beneficiary is a tax resident of a country that has a double tax agreement with Australia, there may be no Australian tax imposed.
The beneficiary will need to check the taxation laws of their country and whether it has a tax treaty with Australia.
Income stream death benefits
If the death benefit is paid as an income stream, the proportioning rule is used to calculate the tax-free and taxable components.
The proportion used to calculate will continue to apply to all benefits paid from the income stream. This includes benefits arising from the commutation of the income stream.
If a death benefit income stream is being paid to a dependant child of the deceased member, unless the child has a permanent disability, the super trustee must:
- stop paying the income stream on or before the date the child turns 25 years old;
- pay the remaining benefit as a tax free lump sum.
Reversionary income stream death benefits
A super income stream will stop when the member who is receiving it dies. The exception is if your fund’s governing rules specify that a dependant beneficiary is automatically entitled to receive the income stream.
If the deceased person was receiving an income stream benefit when they died, the proportioning rule is used if your fund’s governing rules allow for a reversionary income stream to be paid. The trustee must proportion the components of the beneficiary’s reversionary income stream as it did for the deceased’s benefit.
If the income stream stops, the trustee will need to value the super interest and calculate the components before it makes a death benefit payment.
Lump sum death benefits
If the trustee pays a lump sum death benefit to a dependant, the whole amount is tax-free. This is the case whether the lump sum contains a taxed element or an untaxed element.
If the trustee pays a lump sum death benefit to a non-dependant, it will need to calculate the tax-free and taxable components for each benefit paid. Calculations for these components use the proportioning rule.
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