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  • Paying superannuation death benefits

    A superannuation death benefit is a payment you make to a dependent beneficiary or to the trustee of a deceased estate after the member has died. You 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).

    You can pay the deceased's dependants as either or both:

    • a super income stream
    • a lump sum.

    You can pay the deceased's non-dependants:

    • a lump sum.

    Find out about:

    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.

    Next step:

    Treating a death benefit as a member benefit

    A super death benefit arising from the commutation of a super income stream following the death of a member is treated as a member benefit if:

    • the benefit is paid after the latest of:
      • six months after the death
      • three months after the grant of probate of the deceased’s will or letters of administration of the deceased’s estate
      • the payment of the benefit is delayed by legal action about entitlement to the benefit or by reasonable delays in processing the benefit – six months after the legal action
      • the payment of the benefit is delayed by reasonable delays in the process of identifying and making initial contact with potential recipients of the benefit – six months after the processing is completed
       
    • the Commissioner of Taxation has not made a decision that the benefit is not a super member benefit.

    Income stream death benefits

    If you pay the death benefit as an income stream, the proportioning rule is used to calculate the tax-free and taxable components.

    The proportion you 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 you are paying a death benefit income stream to a dependant child of the deceased member, unless the child has a permanent disability, you 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.

    See also:

    Reversionary income stream death benefits

    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. You must proportion the components of the beneficiary's reversionary income stream as you did for the deceased's benefit.

    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 income stream stops, you will need to value the super interest and calculate the components before you make a death benefit payment.

    Lump sum death benefits

    If you pay 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 you pay a lump sum death benefit to a non-dependant, you will need to calculate the tax-free and taxable components for each benefit paid. Calculate these components using the proportioning rule.

    Lump sum death benefits – tax deductions claimed on insurance premiums

    The taxed and untaxed elements are calculated differently where you have claimed, or intend to claim, tax deductions for insurance premiums to provide for future death benefits for your members. The untaxed element of a lump sum death benefit paid to a non-dependant is increased to reflect the insurance component of the benefit. Otherwise no tax would be paid on this component of the death benefit.

    You must calculate the taxed element and the untaxed element of the benefit through a modified calculation:

    • Work out the tax-free and taxable components of the member's super interest just before lump sum was paid.
    • Apply these proportions to work out the tax-free and taxable components of the benefit using the general proportioning rule.
    • The taxed element of the benefit is then calculated as follows:
      • work out an amount by applying the formula:
        amount of super lump sum × service days / (service days + days to retirement)
      • reduce this amount (to no less than zero) by the tax-free component of the lump sum benefit (if any).
       

    The result of this subtraction will be the taxed element of the benefit. The untaxed element of the benefit is equal to the taxable component of the benefit minus the taxed element of the benefit.

    'Service days' for death benefits means the number of days in the service period for the lump sum. These are calculated to the date the deceased died.

    'Days to retirement' means the number of days from the day the deceased died to the last retirement date. This is when their employment would have been terminated under contract or they would have turned 65 years old.

    Example: Tax deductions claimed on insurance premiums

    Marie is a member of a super fund that claims tax deductions on premiums it pays on insurance policies to provide death benefits for its members.

    Marie dies on 1 July 2014.

    The start date of Marie's service period is 10 August 1976. Her last day before retirement was to have been 1 July 2017, when she would have turned 65 years old.

    On 4 March 2015, a lump sum death benefit of $280,000 is paid to Marie's beneficiary. This is paid to her adult son, Tim, who is a non-dependant.

    The service days for the lump sum death benefit are 13,841 (10 August 1976 to 1 July 2014 (date of death)).

    The days to retirement for the lump sum death benefit are 1,095 (1 July 2014 to 1 July 2017).

    Just before the benefit is paid, the value of Marie's super interest is $400,000. This includes a:

    • tax-free component of $100,000
    • taxable component of $300,000.

    Step 1

    Calculate the tax-free and taxable proportions of Marie’s super interest ($400,000) just before the benefit is paid:

    • tax-free component of $100,000 = 25%
    • taxable component of $300,000 = 75%.

    Step 2

    Apply these proportions to work out the tax-free and taxable component of Tim’s lump sum death benefit as follows:

    • $280,000 × 25% = $70,000 tax-free component
    • $280,000 × 75% = $210,000 taxable component.

    Step 3

    Calculate the taxed element as follows.

    Work out an amount by applying the following formula:

    1. amount of super lump sum × service days / (service days + days to retirement).
    2. $280,000 multiplied by 13,841 divided by 14,936 equals $259,472
    3. Reduce this amount by the tax-free component of the lump sum benefit (if any).

    Taxed element

    = $259,472 − $70,000

    = $189,472

    Step 4

    Work out the untaxed element by taking away the taxed element from the taxable component of the benefit.

    Untaxed element

    = $210,000 − $189,472

    = $20,528

    The lump sum death benefit consists of the following components:

    • tax-free component = $70,000
    • taxable component = $210,000 (comprising the taxed element ($189,472) and the untaxed element ($20,528)).
    End of example

    Commutation lump sum death benefits

    If the deceased was receiving an income stream when they died and the income stream is commuted to pay a lump sum to a beneficiary, the proportioning rule is used. The components of the lump sum benefit must be proportioned as they were for the income stream.

    Example: Taxed and tax-free proportions on super income stream

    Anna dies on 1 December 2015 at 66 years old. When she dies, Anna is receiving an account-based super income stream.

    The tax-free and taxable components of her income stream are worked out as follows:

    • tax-free proportion of 25%
    • taxable proportion of 75%.

    Anna's account balance when she dies is $200,000. This amount is paid to her beneficiary, her spouse Brian, as a lump sum on 11 March 2016. As the lump sum is paid from the same super interest as Anna's income stream, the proportions of the tax-free and taxable components are exactly as they were for her income stream.

    The tax-free and taxable components of Brian's lump sum death benefit are:

    Tax-free component

    = $200,000 × 25%

    = $50,000

    Taxable component

    = $200,000 − $50,000

    = $150,000

    As Brian was Anna's dependant, the total benefit is tax-free.

    If Brian was a non-dependant, the taxable component is assessable.

    End of example

    Anti-detriment payment (tax saving amount)

    From 1 July 2017, funds may only include an anti-detriment payment as part of a death benefit if the member has died on or before 30 June 2017. The fund must make this payment by 30 June 2019. From 1 July 2019, no anti-detriment payment will be available for funds members, regardless of when the member has died.

    An anti-detriment payment is an additional lump sum amount that may be paid to an eligible dependant when a lump sum death benefit is paid. The payment represents a refund of the 15% contributions tax paid by the deceased member over their lifetime.

    The payment is only payable where the death benefit is being paid as a lump sum to an eligible dependant of the deceased member, who is either a:

    • spouse or former spouse
    • child (including an adult child)
    • trustee of the deceased estate.

    The governing rules of the fund will determine if an anti-detriment payment is paid. There is no legal requirement to make the payment. If your fund does pay an anti-detriment payment, the trustee can claim an income tax deduction in the financial year in which the lump sum is paid.

    A pro rata deduction is available when only part of the death benefit is paid to an eligible dependant or only part is paid as a lump sum. If the lump sum payment is made through the estate of the deceased member, the amount of the deduction depends on the extent to which an eligible dependant is expected to benefit from the estate.

    For example, if 70% of the death benefit is paid to the member's spouse and 30% is paid to the member's brother, claim a tax deduction for the anti-detriment amount paid. This is 70% of the calculated amount.

    You must make sure that you have sufficient funds available to make the payment. The funds must be separate from the member's super interest. They could be sourced from earnings held in reserve or proceeds of an insurance policy.

    If you are using a reserve to source the extra payment, it is important to note that an allocation from the reserve could be a concessional contribution. This could count against the deceased member's concessional contribution cap for excess contribution tax purposes.

    Where the death benefit is paid to a spouse, former spouse or a dependent child, the whole amount including the anti-detriment payment is tax-free.

    Where the death benefit is paid to a non-dependent child, the anti-detriment payment is included in the taxable component, taxed element.

    See also:

    • ATO ID 2012/10 Income Tax: anti detriment payments paid by a complying superannuation fund to a trustee of a deceased estate
    • ATO ID 2010/5 Complying superannuation fund: deduction for increased amount of superannuation lump sum death benefit
    Last modified: 06 Dec 2016QC 45254