Australia does not have a formal inheritance or estate tax. However, superannuation can attract tax when paid out after you die, depending on who receives it. Most people know this informally as the ‘death tax.’ If you hold a meaningful amount of your wealth in superannuation, it’s worth understanding how it works.
Who does it affect?
The tax applies when a superannuation death benefit goes to a non-tax dependant. A tax dependant includes your spouse, a child under 18, someone in an interdependency relationship with you, or a person financially dependent on you at the time of death. An adult child who was not financially dependent on you does not qualify.
How does the tax work?
A superannuation death benefit has two components: a tax-free component and a taxable component. The tax-free component passes to any recipient without tax.
The taxable component works differently depending on who receives it:
- Paid to a tax dependant: The entire benefit, including the taxable component, passes tax-free.
- Paid to a non-tax dependant: Such as a financially independent adult child, the taxable component attracts tax at 15% on the taxed element and 30% on the untaxed element, with Medicare levy potentially applying depending on how the benefit is ultimately paid.
For many people, particularly those who built their super through employer contributions and investment earnings, the taxable component makes up most of their balance.
In our experience, this catches families by surprise. Consider a member who intends an equal split between several children. If only some of those children meet the tax dependant definition, dividing the benefit equally still produces unequal amounts received. Each beneficiary’s share attracts tax according to their own circumstances, not the member’s intention. Achieving an equal after-tax outcome requires careful planning.
Other factors that can catch families out
A gap exists between who can receive your super and who receives it tax-free. You can validly nominate someone under your fund’s rules while that same person attracts tax as a non-dependant, because they don’t meet the narrower tax law definition. Relying on a beneficiary nomination without checking both definitions can produce an unintended result.
For those with larger superannuation balances, the recently legislated Division 296 tax adds another estate planning consideration. In some circumstances, superannuation benefits pass directly to beneficiaries while an associated Division 296 tax liability falls on the deceased estate. This can mean one group of beneficiaries receives the super while another bears the tax cost.
Life insurance held within superannuation adds further complexity. Insurance proceeds paid through superannuation generally form part of the death benefit. They often increase the taxable component that reaches beneficiaries. Where benefits go to non-tax dependants, this can significantly increase the amount subject to death benefits tax. In some cases, particularly involving untaxed funds, part of the benefit may also attract tax at higher rates as an untaxed element.
What should you do?
Start by understanding whether this applies to your situation. It is especially relevant if a meaningful portion of your intended beneficiaries are adult children or others who wouldn’t meet the tax dependant definition.
Several strategies may help reduce or manage the impact. These include how death benefit nominations are structured and directed, the split of your balance between taxable and tax-free components, and the ownership and structuring of any insurance held within super.
Your broader estate plan also matters. A testamentary trust, for example, can play an important role in how superannuation proceeds are received and held. For many families, this tax only becomes apparent after death, when restructuring is no longer possible.
Speak to us
Every situation is different, and the right plan depends on your personal circumstances, goals, and existing structures. If you’d like to discuss how the tax on superannuation benefits applies to you, please get in touch with Mark O’Toole, Daniel Lunardi, and the Ascent Private Wealth team.