Your superannuation can be a major asset of your estate, so it is important that you direct how you wish your superannuation to be paid following your death.
The payment of your superfund death benefits is governed by the terms of the trust deed which is managed by a Trustee of the relevant superfund.
Depending on the terms of the trust deed, you may be able to nominate a beneficiary or beneficiaries of your superfund death benefits in one of the following ways:
- Binding Nomination: The Trustee is legally bound to pay your superfund death benefits to your nominated beneficiary or beneficiaries, provided they are eligible to receive your superfund death benefits and your nomination is effective and valid as at the date of your death. These nominations usually have a life span of 3 years so it is important to regularly review these nominations.
- Non-Binding Nomination: The Trustee is not legally bound to pay your superfund death benefits to your nominated beneficiary or beneficiaries. The Trustee may consider who you have nominated, but they are not obliged to follow your nomination as they may also consider your dependants.
- Reversionary Pension: The Trustee will pay your superfund death benefits to your nominated beneficiary (generally a spouse) in the form of a pension, as opposed to one lump sum.
Who can you nominate?
Australian superannuation rules specify that nominations can only be made in favour of the following eligible persons:
- Your spouse,
- Your children,
- Anyone who is financially dependent on you, or
- Your Legal Personal Representative (namely, the executor or administrator of your Estate) to be held on behalf of your estate.
Therefore, if the person you nominate to receive your superfund death benefits does not fall within the above categories, the Trustee is not legally obliged to pay your superfund death benefits to the person you have nominated.
If you want your superfund death benefits to be paid to someone outside those categories, it is best to nominate your Legal Personal Representative, who you can direct in your Will to pay the benefits to your intended beneficiary.
What about tax?
It is important to consider the tax implications on the superfund death benefits. Section 302-195 of the Income Tax Assessment Act 1997 (Cth) defines a "death benefits dependant" to include a spouse of the deceased, a child under the age of 18, or a person who is financially dependant of the deceased. This means if, for example:
- any superfund death benefit which is paid by way of lump sum to a death benefits dependant is not assessable and not exempt income.
- any super death benefits which is paid by way of a lump sum to a non-death benefits dependant (such as an adult child), then the taxable component (i.e. the total value of the superfund balance, less the tax-free component) may be taxed in two proportions:
- element taxed in the fund is taxed at a maximum rate of 15%
- element untaxed in the fund is taxed at a maximum rate of 30%
Careful estate planning, which is usually done in consultation with your solicitor and your accountant, can potentially minimise the tax implications of a superfund death benefits payment to a non-death benefits dependant and to ensure your wishes in relation to your superfund death benefits are carried out.
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.