Nick Bruining: Dummies’ guide to the superannuation death tax and how to share your wealth when you’re gone
More than 15 million Australians could be leaving their superannuation in the wrong hands without realising it.
A recent study by Super Fund Consumers revealed more than 15 million people have failed to complete valid superannuation death benefit nominations.
That alarming figure says a lot about the complexity of super, helped by a mishmash of rules that are constantly changing.
For those unsure, here’s a dummies’ guide to super death benefits and how to ensure the money goes to the right people.
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A super fund is basically a “box” on paper. That box holds investments and receives various tax breaks and, sometimes, Centrelink breaks — providing you stick to the rules.
The trustee, or trustees, of the fund are legally responsible for following the rules.
There are two layers of rules — government rules sit on top (the superannuation legislation) and the specific super fund’s rules (the super fund “trust deed”).
And to make life interesting, trust deeds can vary quite a bit between funds.
You can stick money into your super box and take it out. Provided you follow the rules, the fund — and, in turn, you — will get the generous tax and Centrelink breaks.
The amount you have in super is dependent on the amount invested, how well the investments do, and the fees you are charged. While important, fees have the least effect.
Super’s sole purpose is to provide a capital lump sum for your retirement — and for your loved ones if you don’t make the distance.
When can you access it?
Retirement is basically from when you reach 60 and stop working in any job — even a second, part-time gig. At 65, you can get the money out, even if you’re still working — but only if the super fund’s rules permit. Most do.
If you don’t make it through to retirement, the two layers of rules kick in.
If you’re incapacitated and permanently disabled, the fund can pay out the money to you. If you die, it must pay the money to your dependants or to your estate. The super fund has no choice under the rules.
Other “early access” conditions have very tough rules and loosely fall under “severe financial hardship” and “compassionate” grounds.
Who gets your savings?
A superannuation death benefit is not automatically part of your estate.
The benefit must be dealt with, and cannot remain in the deceased’s super account. The amount involved is often boosted dramatically by any life insurance proceeds.
Valid dependants are usually your partner and children. Generally, parents, brothers, sisters, best mates and even grandchildren are not dependants.
There is a further test that determines what tax is paid.
If paid to a dependant that is financially reliant on you like your partner, a co-dependant or kids under 18, then the benefit goes to them tax-free.
If paid to a dependant that does not rely on you financially at the time of your death, the benefit is taxable.
Two key components
Almost all super benefits have an exempt component and a taxable component. It is proportionally applied and you can find out your particular components from your super fund.
The tax-free, or exempt, part of a death benefit payout is always exempt.
For a normal dependant, the taxable component is subject to tax at 15 per cent, plus a 2 per cent Medicare levy. Because this is taxable income, it can mess up other things like entitlements to family tax benefit, paid parental leave, or trigger extra super contributions tax.
If, however, it is paid to a deceased’s estate, the will takes over and the money is distributed as per the will. It is still subject to the 15 per cent tax, but because the estate is not a “natural person”, no Medicare levy applies, saving at least 2 per cent.
If it is then paid to the beneficiaries of the will, it is not normally taxable income. It is not even declared on their tax returns.
To ensure your wishes are followed, any member of a super fund can give the trustees directions on how they want their death benefit paid.
To confuse matters further, there are three types of directions, but the recipients in all cases must always satisfy the dependency test.
Get your nominations in
A death benefit nomination alerts the trustees on how you would like your death benefit distributed. But that’s it.
A binding death benefit nomination binds the trustees to pay as instructed, but this needs to be renewed every three years.
A non-lapsing binding death benefit nomination is as it states, and is the “rolled-gold” variety. You only need to do it once, though it can be updated if required.
These variations often result from outdated trust deeds where the trustees have not adopted changes to reflect new rules. This is a big risk with self-managed superannuation funds.
The death benefit nomination form can be accessed from your super fund’s website or is part of the suite of standard documents for an SMSF. Sometimes it can be done online. Paper versions generally require two witnesses.
It must be completed showing the portions payable to the dependants as a percentage.
You can also instruct that the death benefit is paid to your estate. You will see the term “legal personal representative” — or LPR — on the form.
In effect, this will be your executor or the administrator of your estate, and then your will takes over.
