Note: this article deals only with standard industry and retail superannuation funds. For detailed discussion of Self Managed Superannuation Funds, click here for our other articles.
Does superannuation form part of your estate?
Generally, superannuation does not form part of your estate unless the trustee of the superannuation fund pays your member ‘death benefits’ (the balance of your superannuation account) directly to your estate.
The trustee of your superannuation fund is a representative from the company that holds your superannuation. They will be the person who distributes the proceeds of your superannuation.
Superannuation can be dealt with separately from your estate through use of a Binding Death Benefit Nomination form (see below)
There will be different tax implications depending on the ultimate recipient of your superannuation death benefits.
Who are superannuation death benefits paid to?
In determining who payments are made to, the trustee of the superannuation fund must consider the governing rules of the fund, as well as ensure that any payments are permitted by both the trust deed of the superannuation fund and Australian superannuation laws. Unless they are bound to pay the superannuation death benefits in a particular manner on your death the trustee has the discretion to pay the superannuation death benefits to any one or more of your superannuation dependants and/or your estate (via the legal personal representative) in the proportions it sees fit.
Who are ‘superannuation dependants’?
Australian superannuation laws determine who can receive a benefit following the death of the superannuant. They are often referred to as ‘superannuation dependants’.
The superannuation dependants of the deceased are:
- a spouse (which includes a de facto partner);
- a child (regardless of age);
- a person who was financially dependent on the deceased at the time of their death; or
- a person who was in an interdependent relationship with the deceased at the time of their death.
Alternatively, payments may be made to the deceased member’s estate (via their legal personal representative).
If you wish for the benefit of your superannuation to go to someone who is not your superannuation dependant, you will need to direct your superannuation on your death to your estate. From there you can make appropriate provisions in your Will regarding distribution of your assets. Directing your superannuation in this way, however, may have taxation and other estate planning consequences for your estate and/or your beneficiaries.
What are ‘Binding Death Benefit Nominations’?
If permitted by the trust deed of the superannuation fund, it is possible for you to provide specific instructions as to where the proceeds of your superannuation account should be paid on your death.
In order for your specific instructions to be binding on the trustee of the superannuation fund, it must be in the form of a valid Binding Death Benefit Nomination (‘BDBN’).
A valid nomination must have the following characteristics:
- nominations may only be in favour of superannuation dependants or your estate (via your legal personal representative);
- you must set out the proportion or proportions of the benefit payable to each of your superannuation dependants;
- nominations must be made to the trustee of the superannuation fund in writing;
- they must be signed and dated by the member in the presence of two witnesses who are both over the age of 18 years and who are not nominated as beneficiaries;
- they must contain a declaration signed and dated by the witnesses stating that the notice was signed by the member in their presence; and
- the notice must be sent to the trustee of the superannuation fund and is not valid until it is received and approved by the trustee.
Most industry and retail superannuation funds will have a standard form of nomination which you can retrieve from their website or by contacting them. If an approved form is available, then you should use that form.
It is important to note that BDBNs will not be available for all superannuation funds and they specifically do not apply to the Commonwealth Superannuation Scheme (CSS) or the Public Sector Superannuation Scheme (PSS).
It is also important to note that most BDBNs lapse after three years from the date they are signed and must be renewed on their expiry to bind the trustee on your death.
How are superannuation death benefits taxed?
How superannuation is taxed following the death of the superannuant will depend on several factors, including:
- the components i.e. taxable (taxed and untaxed elements) and the tax-free component of the superannuation balance;
- whether the benefit is being paid as a lump sum or a superannuation income stream; and
- to whom the superannuation death benefits are paid.
If you were a tax dependant of the deceased, then the death benefit can be paid as either a lump sum or an income stream. If you were not a tax dependant, then the death benefit must be paid as a lump sum.
Tax dependants are defined similarly to superannuation dependants, but only include the deceased’s children if they are under 18 years old and financially dependent on the deceased at the time of the deceased’s death.
For taxation purposes, there are tax concessions and options available to the tax dependants of the deceased which are not available to non-dependants.
In relation to a lump sum payment, a tax dependant will usually receive the payment tax-free whereas a non-dependant will pay tax on the taxed and untaxed components of the payment plus the Medicare levy. A higher rate of tax applies to the untaxed component than that of the taxed component.
Different rules apply for tax dependants who receive the benefit in the form of an income stream.
Superannuation in relation to your estate can be a complex issue. If you require assistance to appropriately direct your Superannuation on your passing, or if you require help with the superannuation distribution requirements on a deceased estate get in touch with Tetlow Legal on (02) 6140 3263 or [email protected].