super beneficiaries

Superannuation and wills

For most people superannuation will be their second biggest asset after their home and it is important to know how it works with regards to will.

The technical set up of a superannuation fund is this: superannuation benefits are not owned directly by fund members, but are held in trust and only the trustee of the superannuation fund is permitted to pay them. And because superannuation money is put aside for retirement, it is treated differently to other estate assets on the death of a superannuation fund member.

Nominating a beneficiary

A member can not make instructions in their will on how the superannuation funds are to be distributed. What the member can do is to nominate a beneficiary to receive their superannuation benefits in the event of their death. And in order for the trustee of the superannuation fund to accept that member’s nomination of beneficiary, the beneficiary must meets the definition of dependant in the SIS Act, or their legal personal representative (LRP), who may then distribute the proceeds in accordance with the will.

Definition of dependant

The superannuation definition of a dependant, because only superannuation dependants can receive a death benefit (except where there is no dependant), but only tax dependants receive concessional tax treatment on superannuation death benefits received.

Dependants under superannuation legislation

Superannuation death benefits can be paid to ‘dependants’ as defined in sub-section 10(1) of the SIS Act. This includes:

-          spouse (including de facto and same sex partners)

-          children (of any age)

-          financial dependants

-          people in an interdependency relationship with the deceased, or

-          the deceased’s LPR on behalf of the estate.

Dependants under taxation legislation

While the SIS Act governs who can receive superannuation death benefits, it is the Income Tax Assessment Act that governs the tax consequences of the payment of superannuation death benefits. For tax purposes, a death benefits dependant is defined to include:

-          a spouse or former spouse (including de facto and same sex partners)

-          a child, aged less than 18

-          any person who had an interdependency relationship with the member just prior to death

-           any person who was a dependant of the member just prior to death, or

-           any person who receives a superannuation lump sum because of the death of another

Taxation of superannuation death benefits

What all this means is that the dependants you nominate are likely to pay tax unless they fall within the definitions of the tax legislation. For example, all proceed (regardless of the amount) paid to a dependant for tax purposes, will be tax free. The same applies where a lump-sum superannuation death benefit is paid to an estate and the estate pays the proceeds to a dependant for tax purposes.

If the proceeds of a lump-sum superannuation death benefit are to be paid to a non-dependant, the tax-free component of the payment will be tax free. However, the taxable component will be subject to tax at up to either 16.5 per cent or 31.5 per cent (including the Medicare levy but excluding flood levy) depending on whether the taxable component is a taxed element or an untaxed element.

So what should you do?

As soon as you read this blog – take the time to find out from your superannuation fund who your beneficiaries are. Most clients do have their spouses and children, which in most case is OK – but over the years as marriages break-up and the children grow up and stop being financially dependant then it is time to change the nominations. As a rule, if your children are grown up, married and have their own separate lives they should not be nominated as beneficiaries in your superannuation fund.

If not sure, feel free to ask me – my business is to keep your financial affairs in proper order.