Who Gets My Super
Who gets my super when I die? Did you ever ask yourself that question?
Who Gets My Super
Our lawmakers want your super to be gone when you go. That’s why they gave you – in their eternal wisdom – minimum pension payments to contend with. That is why it gets harder and then impossible to make personal contributions past 74. And why there are caps on contributions full stop.
But let’s assume that despite all their efforts, at the end you still have some super left. Who gets it?
The simple answer is that you can leave your super to whoever you like. It is your super. You can make a binding death benefit nomination or leave it to the trustee’s discretion. Your choice.
But there are strict rules around how your super is actually paid out and how much tax it cops on the way out.
SIS dependant is a strange word. But it is an important one. You will shortly see why. Your SIS dependants are:
1 – Your spouse (married or de-facto but not your ex)
2 – All your children regardless of age
3 – Anybody living in an interdependency relationship with you
4 – Anybody financially dependant on you who is not your child
For an interdependency relationship think of your elderly mother who lives with you. You live together, have a close personal relationship and one of you provides financial and domestic support as well personal care to the other.
Financially dependant means just that – somebody depends on you financially. Think of your orphaned nephew who you put through college.
Directly or Via Estate
Upon your death, your super can leave your fund in two ways.
Your super can go 1 – directly from your fund to your SIS dependants, or 2 – into your estate and then your legal personal representative (LPR) will distribute it – in accordance with your will if you left one.
So anybody can receive your super through your estate but only your SIS dependants can receive it directly from your fund.
Lump Sum or Pension
Your super is usually paid out as a lump sum – either in cash or in specie. In specie means that the asset is transferred.
Lump sum is the default mode. It means your super leaves the low-tax super environment straight away and in one hit – the legislator’s preferred option.
But there is another way and that is a death benefit pension. With a death benefit pension your super stays within super and is only slowly paid out via pension payments.
The legislator doesn’t like this one for obvious reasons. And so they limited the circle of possible recipients to your spouse, your children under 18 as well as anybody living in an interdependency relationship with you or financially dependant on you who is not your child.
Your adult children, however, are out. They need to take their super as a lump sum.
But there two exceptions. A child between 18 and 24 and financially dependant on you can get a death benefit pension but needs to take the rest as a lump sum on their 25th birthday. And children with a disability can receive a death benefit pension regardless of age.
Now you know who can get your super and how. The next step is to look at how much tax your super cops on the way out. And for this you need to work out who your tax dependants are.
Your tax dependants receive all your super tax-free. Non-tax dependants receive your tax-free component tax-free, but pay tax on your taxable components (15% on any taxed element and 30% on any untaxed element).
So who are your tax dependants? There are 4 types.
1 – Your spouse (married, de-factor as well as former spouses)
2 – Your children under 18
3 – Anybody in an interdependency relationship with you
4 – Anybody financially dependant on you
A child over 18 can still be your tax dependant if they live with you in an interdependency relationship or are financially dependant on you (just in case you ever want to look this up: ATO ID 2014/22).
In most cases your SIS dependants are also your tax dependants and vice versa – but with two exceptions.
1 – Your financially independent adult children are your SIS dependants, but not your tax dependants. So they can get your super directly from your fund, but pay tax on it. So leave your super to your spouse or dependant family members or cash it out before you go.
2 – A former spouse is your tax dependant but not your SIS dependant. So if your estate paid your super to your ex, then she or he wouldn’t pay tax on it.
For all your tax dependants you can stop here – no tax to pay.
But for your non-tax dependants here is how much tax they will pay. It all depends on how much of your super sits in your tax-free and taxable components.
Tax-free and Taxable Components
Your super consists of two components – tax-free and taxable.
In theory the taxable component consists of two elements – taxed and untaxed, but untaxed elements are rare, so most taxable components consists of just taxed elements.
Untaxed elements usually only appear if there has been a pay-out from a life insurance policy held by the fund or the fund itself is untaxed, which only applies to certain government sector funds.
Every recipient receives these components and elements in the same proportion as they exist in the relevant super account. So you can’t pick and choose who gets what component or element.
The good news is that your non-tax dependants pay zero tax on your tax-free component.
The bad news is that they pay tax on the taxable component. How much depends on whether your super is paid as a lump sum or as a death benefit pension.
Non-tax dependants pay 15% tax on any taxed element and 30% on any untaxed element – both plus Medicare – if they receive your super as a lump sum. Age doesn’t affect the taxation of lump sums. But it does for death benefit pensions.
Death Benefit Pensions
Age only matters for the taxable components of death benefit pensions. Tax-free components are tax-free regardless of age.
If one of you is 60 or over at the time of your death, the taxable component of any pension payments is tax-free.
However, if one of you is below 60 at the time of your death, then your beneficiary includes any taxable component in their assessable income with a 15% tax offset. But this stops the moment the beneficiary turns 60. From then on the beneficiary will receive the taxable component tax-free.
There is just one exception to all this – untaxed super funds. But these are rare and a dying specie within the government sector, so let’s not worry about those.
Death Benefit Nomination or Valid Will
So now it is time to put all this in place. You decide how you do this. You can
1 – Make a binding death benefit nomination that pays your super to your SIS-dependants and/or estate – renew every 3 years or make it non-lapsing;
2 – Make a non-binding death benefit nomination to your SIS dependants and/or estate but the trustee makes the final decision.
3 – Make no death benefit nomination and leave it up to the trustee to decide how much should go to your SIS dependants and/or estate;
And for any super within your estate:
4 – Make a will that stipulates who gets how much of your super; or
5 – Leave it up to your LPR (executor or administrator) to decide what happens to your super in your estate.
Looking at all this, is this really what you want?
For example, are you sure you really want your super to go to your financially independant adult children, even when they have to pay 15% or 30% tax plus Medicare on any taxable component?
Or are you sure you really want to leave it up to others by not having a binding nomination and will?
If you aren’t, please give us a call. We will be able to help. It would be a pity to get this wrong and have your super go places or trigger tax that you didn’t want.
Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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Last Updated on 17 July 2020
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We look after the tax and accounting of your business, wealth and SMSF. We are Chartered Accountants and Registered Tax Agents in Australia and IRS-registered CPAs in the US.