Who will get your superannuation and what might the tax
implications be for the beneficiary?
Set out below are the general rules regarding superannuation
beneficiaries as well as binding death benefit nominations and
The General Rule
According to the Superannuation Industry (Supervision) Act
1993 (SIS Act), "death benefits"
under a superannuation policy must be paid to the member's
dependants or to the member's Legal Personal
The SIS Act defines a "dependant" as the spouse, child
or any person with whom the member had an "interdependency
A "child" includes an adopted child, a stepchild or an
ex-nuptial child of the person, a child of the person's spouse
and someone who is a child of the person within the meaning of the
Family Law Act 1975.
An "interdependency relationship" exists if two
persons have a close personal relationship or they live together or
one or each of them provides the other with financial support or
domestic support and personal care. Interdependency also includes
same sex partners, two elderly siblings who reside together or an
adult child who resides with and cares for an elderly parent and
If someone who is not covered under the definition of
"interdependency relationship" or the deceased's
Legal Personal Representative is nominated to receive the
superannuation death benefit, the trustee of the superannuation
fund cannot pay the benefit to that person. Therefore, the general
rule is that the trustee can only pay death benefits to the
beneficiaries as defined under the SIS Act or to the Legal Personal
Representative of your estate.
There is, however, an exception to "the general rule":
a binding death benefit nomination.
Binding Death Benefit Nomination (BDBN)
A BDBN is a direction to the superannuation fund's trustee
to pay the member's death benefit to a nominated dependant or
dependants of the member. These nominations are only valid and
binding on the trustee for a continuous period of three years.
It is therefore possible for the member to compel the trustee to
pay the death benefit as directed in the nomination, but note that
the nominated beneficiaries cannot be outside the definition of
"dependant" as defined in the SIS Act.
Careful consideration should be given to the tax implications of
your proposed BDBN. The tax implications on the beneficiary of the
superannuation funds will depend upon the "taxable" and
"tax-free" components of the superannuation contributions
made to the fund during the member's lifetime and to whom they
Death benefits paid to a tax-dependant will be entirely tax
free, whereas death benefits paid to a non-tax dependant will be
taxed as follows:
the "taxable" component will be subject to 16.5% tax;
the "tax-free" component will be tax free.
A "tax-dependant" includes your spouse (or former
spouse), a child aged under 18, any other person with whom you had
an interdependency relationship just before you died, or any other
person who was financially dependent on you just before your death.
Generally, a death benefit paid to an adult child will be subject
to tax of 16.5% as per (2) above (unless they were financially
dependent upon you).
It is worth considering drawing your superannuation entitlements
(tax-free) whilst you are still alive so as to avoid the incidence
of the 16.5% tax component imposed under (1) above. However, this
could adversely impact on any pension entitlements you may have
– you must consult your financial advisor and/or
It is crucial to determine the taxable and tax-free components
of your superannuation contributions to ascertain the tax
implications of the superannuation death benefit. This may affect
what actions or planning should be considered as part of your
Consider a payment and re-contribution strategy. This involves
being paid member benefits (tax free) and then re-contributing
non-concessional contributions. This may change the mix of benefits
from taxable to entirely tax free.
There are limits on contributions and, importantly,
contributions can only be made if the member is either under age 65
or, if over age 65, they must be gainfully employed.
Lastly, set a reminder to yourself for every three years to
update your BDBN, thus ensuring you retain some sort of influence
on where your superannuation eventually ends up.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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There are several requirements that must be completed by an executor before the distribution of assets to beneficiaries.
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