Provides information for superannuation funds which pay a lump sum death benefit after 1 July 2007
A superannuation death benefit is a payment that may be made in a variety of circumstances because of the death of another person. Most commonly the payment would be made by a superannuation fund to another person because of the death of a member of that fund. A superannuation death benefit may generally be paid either as a superannuation income stream benefit or as a superannuation lump sum.
If a member dies on or after 1 July 2007, non-dependants and trustees of deceased estates can only receive lump sum death benefits.
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Transitional arrangements apply to non-dependants who commenced a death benefit income stream prior to 1 July 2007. A death benefit income stream that was being paid to a non-dependant prior to 1 July 2007 is taxed in the same manner as a death benefit income stream paid to a dependant.
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A dependant is:
- a spouse or de facto spouse
- a former spouse or de facto spouse
- a child of the deceased under 18 years of age
- any person who relied on the deceased for financial maintenance at the time of their death, or
- any person who lived with the deceased in a close personal relationship where one or both of them provided financial and domestic support and personal care.
Any person who does not fall into one of the categories of dependant listed above is classified as a non-dependant for superannuation death benefit purposes.
A lump sum death benefit may consist of a:
- tax-free component; and
- taxable component which includes an element
- taxed in the fund; and/or
- untaxed in the fund.
Funds will need to calculate these components for each benefit that is paid. The proportioning rule is generally used to calculate the tax-free and taxable components of a benefit.
Generally, when a benefit is paid out from a 'superannuation interest', the benefit is taken to be paid in the same proportion of tax-free and taxable components that these components made up the total value of the superannuation interest just before the benefit is paid.
The tax-free component of a superannuation interest is the total value of the following segments the:
- 'contributions segment'; and
- 'crystallised segment'.
The contributions segment generally includes all contributions made from 1 July 2007 that have not been included in the assessable income of the fund. Typically these would be member contributions where no personal tax deduction has been claimed by the member.
Rollovers are also included as contributions to the extent that they have a tax-free component.
The crystallised segment includes the following existing components of an interest that are consolidated into the tax-free component:
- the concessional component
- the post-June 1994 invalidity component;
- undeducted contributions;
- the capital gains tax (CGT) exempt component; and
- the pre-July 83 component.
The crystallised segment is calculated by assuming that an eligible termination payment (ETP) representing the value of the superannuation interest (less any untaxed part of the interest, if any)is made in respect of the member just before 1 July 2007.
The taxable component of a superannuation interest is calculated by subtracting the tax-free component from the total value of the superannuation interest.
The taxable component of a superannuation benefit may consist of an element taxed in the fund or an element untaxed in the fund, depending on whether the benefit is paid from a taxed or untaxed source. Funds will need to determine these elements before paying any superannuation death benefits.
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Where a fund has claimed or intends to claim tax deductions on premiums paid for insurance policies to provide superannuation death benefits for members, the element untaxed in the fund of a lump sum death benefit may be increased.
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As explained earlier, the proportioning rule is applied to calculate the tax-free and taxable components of a superannuation benefit.
Example
On 2 December 2007, Harry receives a lump sum death benefit of $100,000 following the death of his grandmother, Mary.
The total value of Mary's superannuation interest was $500,000 just before the lump sum benefit is paid. The superannuation interest included a tax-free component of $200,000 made up solely of the crystallised segment and a taxable component of $300,000, made up solely of an element taxed in the fund.
Step 1:
Calculate the tax-free and taxable proportions of the superannuation interest just before the lump benefit is paid:
Tax-free component = $200,000 = 40%
Value of the interest $500,000
The taxable proportion of the superannuation interest would therefore be 60%
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Step 2:
Apply proportions worked out under Step 1, to calculate the tax-free component of Harry's lump sum death benefit as follows:
$100,000 x 40% = $40,000
The taxable component of the death benefit would therefore be $60,000 ($100,000-$40,000).
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There is no requirement for the fund to withhold any tax from a lump sum death benefit made to a dependant, regardless of their age.
In addition, there is no requirement for the fund to issue a payment summary in relation to such lump sum payments.
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Lump sum superannuation death benefits paid to non-dependants of Australian Defence Force and police personnel who have died in the line of duty will receive the same concessional tax treatment as if the benefit is paid to a dependant.
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Tax-free component - No tax withheld
Taxable component - element taxed in the fund - withhold tax at the rate of 16.5%
Taxable component - element untaxed in the fund - withhold tax at the rate of 31.5%
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Where the recipient does not provide their tax file number before the payment is made, withhold tax at the rate of 46.5% from the total taxable component.
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The fund must provide a payment summary within 14 days of making the lump sum payment. The amount of the tax-free component, the amount of the taxable component, the amount of the tax offset and the amount of tax withheld are included on the payment summary at the relevant labels.
There is no requirement for the fund to withhold any tax from a lump sum death benefit paid directly to the trustee of a deceased estate.
However, the fund must provide a payment summary within 14 days of making the lump sum payment. The amount of the tax-free component and taxable component of the payment are included on the payment summary at the relevant labels.
For more information about withholding from superannuation lump sums, refer to fact sheet Tax Table for superannuation lump sums (NAT 70981, PDF, 105KB)
For more information on completing payment summaries, refer to fact sheet How to complete PAYG payment summary - superannuation lump sum form (NAT 70946)
Last Modified: Thursday, 2 April 2009