Knowledge Test

Knowledge Topics

Death Benefits – How are they taxed?

21 March 2018

With each passing year you are not getting any younger – surprise, surprise! The same applies for your beneficiaries - are you aware of the tax consequences of their changing circumstances? Without careful consideration and planning given to the tax implications for your beneficiaries, they may feel less than splendid when the tax man steps in to take his cut.

Dependent or Non-Dependent

Both the Superannuation Industry Supervision (SIS) Act 1993 and Income Tax Assessment (ITA) Act 1997 define a Dependent. The distinction between the two Acts is important as the SIS Act determines who can receive a death benefit while the Tax Act determines how the benefit can be paid and how it is taxed. Dependent definition comparison in table below:

Superannuation Dependant (SIS Act 1993)Tax Dependant (ITAA 1997)
Spouse, de facto partnerCurrent/former spouse, de facto partner
Child of any ageChild under 18 years
“Interdependency relationship” – Sect.10A

Close personal relationship, someone who you live with, where one or both of you provides financial, domestic support & personal care

“Interdependency relationship” same definition
Any other person who was a dependant, particularly financial


Tax Implications for a Dependent of the deceased

Dependants for tax purposes can receive death benefits as either a lump sum or as an income stream. The different rates of tax on the taxable components of the benefits received are tabled below.

Age of DeceasedAge of BeneficiaryDeath Benefit TypeTax on Taxed ElementTax on Untaxed Element
Any AgeAny AgeLump SumTax FreeTax Free
> 60Any AgeIncome StreamTax FreeMarginal Tax Rate less 10% Tax Offset
Except Child > or = 25 with no disabilityLump Sum
Any Age> 60Income StreamTax FreeMarginal Tax Rate
less 10% Tax Offset
< 60< 60Income StreamMarginal Tax Rate
less 15% Tax Offset
Marginal Tax Rate


Tax Implications for a Non-Dependent of the deceased

Non-dependants for tax purposes can only receive a death benefit lump sum. The taxable component of the payment will be taxed at their marginal tax rate + Medicare, however this may be reduced by tax offsets.

Age of DeceasedAge of BeneficiaryDeath Benefit TypeTax on Taxed ElementTax on Untaxed Element
Any AgeAny AgeLump SumMarginal Tax Rate or 17% (15% + Medicare) whichever is lowerMarginal Tax Rate or 32% (30% + Medicare) whichever is lower
Any AgeAny AgeIncome StreamNot permitted after
1 July 2017.
Death Benefit streams commenced prior to
1 July 2017 taxed as if paid to a dependant.
Not permitted after
1 July 2017.
Also taxed as if paid to a dependent.

Practically speaking, the superannuation fund will be required to register with the ATO for PAYG withholding in order to withhold the appropriate amount of tax from the payment and remit it to the ATO. A PAYG payment summary will then need to be issued to the beneficiary for inclusion in their personal income tax return for the relevant tax year.

Example (A)

Facts

  • Jeff dies on 5 Nov 2017 at 67 years old
  • He was receiving an account based income stream
  • Account balance when he died was $1,150,000
  • Tax free proportion 35%
  • Taxable proportion 65%
  • Stella is Jeff’s spouse and sole beneficiary
  • She is 59 years old
  • Elects to take Jeff’s death benefit as a lump sum on 8 Jan 2018

Answer

Tax free and taxable components of Stella’s lump sum death benefit are:

Tax free component: $1,150,000 x 35% = $402,500

Taxable component: $1,150,000 x 65% = $747,500

As Stella was Jeff’s dependent, total benefit is tax free. If Stella was a non-dependent, taxable component is assessable.

Example (B)

Facts

Mary

  • 64 years old
  • $1,027,000 super balance in a transition to retirement income stream
  • Tax free proportion 20%
  • Taxable proportion 80%
  • Beneficiaries 2 sons 50% each

Steve

  • 35 years old
  • Married with 3 kids
  • 37% marginal tax rate

Rob

  • Rob 24 years old
  • Living at home, financially dependent upon Mary
  • Nil marginal tax rate

Scenario 1 – What are the tax implications for Mary’s beneficiaries if she passed away today?

  • Ignoring other income/expenses of the Fund.
  • For Rob as he qualifies as a dependent and is under the age of 25 – he can either take his entitlement as a lump sum or as an income stream (however, as soon as he turns 25 he will need to withdraw the remaining balance as a lump sum). Either way his beneficiary entitlement is tax free.
  • For Steve it’s a different matter. As a non-dependent he’s required to pay 17% tax on the taxable component of his beneficiary entitlement. Meaning the tax man gets $69,836 of Steve’s entitlement.

 

Mary
Super BalanceTax Free ComponentTaxable Component
Taxed ElementUntaxed Element
$1,027,000.00$205,400.00$821,600.00$0

 

Steve
50% EntitlementTax Free ComponentTaxable Component
Taxed ElementUntaxed Element
$513,500.00$102,700.00$410,800.00$0
Lump sum (non-dependent)
Tax rate0%17%32%
Tax$0$69,836.00$0

 

Rob
50% EntitlementTax Free ComponentTaxable Component
  Taxed ElementUntaxed Element
$513,500.00$102,700.00$410,800.00$0
Income stream
Tax rate0%0%32%
Tax$0$0$0

 

 Scenario 2 – Tax implications if Mary had undertaken a re-contribution strategy in the 3 years prior to her death?

  • Ignoring other income/expenses of the Fund.
  • If Mary had undertaken such a strategy there is no effect on Rob’s beneficiary entitlement as its tax free anyway due to him qualifying as a dependent of Mary.
  • For Steve it’s a different matter. The taxable component of the beneficiary distribution is now $302,105 compared to $410,800 previously. At a 17% tax rate it represents a tax saving of $18,478 to Steve.
Mary
Super BalanceTax Free ComponentTaxable ComponentTax Saving
Taxed ElementUntaxed Element
$1,027,000.00$422,789.45$604,210.55$0$0

 

Steve
50% EntitlementTax Free ComponentTaxable ComponentTax Saving
Taxed ElementUntaxed Element
$513,500.00$211,394.73$302,105.27$0
Lump sum (non-dependent)
Tax rate0%17%32%
Tax$0$51,357.90$0$18,478.10

 

Rob
50% EntitlementTax Free ComponentTaxable ComponentTax Saving
Taxed ElementUntaxed Element
$513,500.00$211,394.73$302,105.27$0
Income stream
Tax rate0%0%0%
Tax$0$0$0$0

At Xpress Super, we are familiar with these requirements and understand also the sensitivity with which these transactions need to be carried out.

Further Resources

The above article only examines basic elements of taxation of death benefits as is accurate at 1/3/2018.

The tax calculation is more complex where life insurance is involved and the ATO provides an example here:

https://www.ato.gov.au/super/apra-regulated-funds/paying-benefits/paying-superannuation-death-benefits/

Where there are Untaxed Elements in the death benefit the tax calculation is more complex, ATO provides an example here:

https://www.ato.gov.au/Super/APRA-regulated-funds/Paying-benefits/Calculating-components-of-a-super-benefit/#Payingalumpsumwithanuntaxedelement

This content was provided by Xpress Super. For further information please contact Emma Cass on 1300 216 890 or visit the Xpress Super website.

Disclaimer: Any information that is financial product advice is provided by Xpress Super Pty Ltd (AFSL No. 430962) (“Xpress”). The advice provided is general in nature and is not personal financial product advice. The advice provided has been prepared without taking into account your objectives, financial situation or needs and because of this you should, before acting on it, consider the appropriateness of it having regard to your objectives, financial situation and needs. You should carefully read and consider any product disclosure statement that is relevant to any financial product that has been discussed before making any decision about whether to acquire the financial product. Please refer to Xpress’ FSG for further information and information about remuneration and associations with product issuers.

2018-04-12T00:54:37+00:00