Tax on a super death benefit lump sum.
Tax on the death benefit
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Net benefit received
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Your breakdown
Updates live as you type| Component | Amount | Tax to a non-dependant |
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The tax most people forget their super can trigger
Super is tax-free to you once you retire after 60, so it is natural to assume your balance passes to your family the same way. It often does not. When super is paid out as a death benefit, the tax depends entirely on who receives it. Pay it to a tax dependant, such as a spouse, and the whole lot is tax-free. Pay it to a non-dependant, most commonly an adult child who is not financially reliant on you, and the taxable portion is hit with 15 percent plus the 2 percent Medicare levy. This tool splits your balance into its taxable and tax-free components and shows the tax and the net benefit for each type of beneficiary.
Two components, two very different fates
Every super balance is made up of a tax-free component and a taxable component. The tax-free component comes from after-tax contributions you made over the years, and it is always paid out tax-free to anyone, dependant or not. The taxable component, usually the larger part, comes from your employer's contributions, salary sacrifice, and the fund's investment earnings. For a non-dependant, only this taxable component is taxed, at the combined 17 percent the tool applies, which is the 15 percent rate on the taxed element plus the 2 percent Medicare levy. The tax-free component beside it sails through untouched. Getting clear on which component is which is the whole game in estate planning for super.
A $500,000 benefit to an adult child
Suppose your super death benefit is $400,000 of taxable component and $100,000 of tax-free component, paid as a lump sum to an adult child who is not a tax dependant. The tool shows tax of $68,000 and a net benefit of $432,000.
Switch the beneficiary to a tax dependant and the tax drops to zero: the same $500,000 passes in full. That $68,000 swing, on identical money, is decided purely by the relationship of the person who inherits it.
Planning ahead with the cash-out strategy
The single most useful technique here has a blunt name: the recontribution or cash-out strategy. If you are over 60 and have unrestricted access to your super, you can withdraw money tax-free and recontribute it as a non-concessional contribution, which converts taxable component into tax-free component within the contribution caps. Done over a few years, this can dramatically shrink the taxable portion that would otherwise cost your adult children 17 percent. A second technique, where it suits, is the death benefit being directed to a tax-dependent spouse first, who then has time to draw it down tax-free, rather than skipping straight to non-dependent children. These moves need to be made while you are alive and well, because none of them can be done after death.
A few traps are worth naming. The 17 percent rate this tool uses assumes the benefit is paid from your estate or directly with the Medicare levy applying; a benefit paid through the estate to a non-dependant is taxed at 15 percent without the Medicare levy, a small difference that depends on the payment path. The tool also covers only the taxed element, which is the normal case for retail and industry funds; some older or untaxed funds have an untaxed element that is taxed far more heavily, up to 32 percent including Medicare, so check your fund. Finally, a valid binding death benefit nomination is essential, because without one the trustee decides who receives your super, and that discretion can override what your will says.
Are adult children really non-dependants?
Usually yes, and it surprises many parents. For super death benefit tax, a child aged 18 or over who is not financially dependent on you and not in an interdependency relationship is a non-dependant, even though they remain your child in every other sense. A child under 18, or an older child who genuinely relies on you financially, can qualify as a tax dependant. The distinction is about financial dependency, not the family bond.
Does it matter if the benefit is paid as a lump sum or a pension?
It can, and only dependants have the pension option. A tax dependant can choose to receive the benefit as an income stream rather than a lump sum, which has its own age-based tax treatment, while a non-dependant must take a lump sum, the case this tool models. Because a non-dependant cannot stretch the benefit into a pension, the lump-sum tax shown here is the relevant figure for them.