What Happens to Superannuation Assets When Someone Dies?

Categories: Articles, Superannuation
30 November 2023

We all know that we can’t take it with us when our time on this earth comes to an end. So what happens to assets that are still in an individual’s superannuation fund when they die?
The payout of a deceased person’s superannuation fund balance is referred to as a “superannuation death benefit”. Who is allowed to receive the deceased individual’s superannuation balance? Is there any tax to pay?

This is a big topic, but here is a broad summary of what can happen and how tax, if any, might be imposed.

The first thing to understand is that the death of an individual that has a balance left in their superannuation fund is a compulsory cashing event. That is, the trustee of the superannuation fund must pay out the deceased person’s superannuation balance “as soon as practicable”. Generally, if the superannuation balance is paid out within 6 – 12 months of the date of death, that is likely to be acceptable to the Tax Office.

Who can receive the death benefit?
Broadly, the superannuation rules state that a superannuation death benefit can be paid to the deceased individual’s estate or the deceased individual’s “dependants”. “Dependant” is
defined to be:

The person’s spouse – this includes people of the same sex and whether or not they are legally married. A spouse includes another person, who was living with the deceased
individual on a genuine domestic basis in a relationship as a couple.
Any child of the deceased person
Any person with whom the deceased person had an “interdependency relationship”

In what form can the death benefit be received?
Superannuation death benefits can be received as a lump sum (payable in no more than two instalments) or as a “superannuation income stream” in the “retirement phase” (broadly, a
pension from the superannuation fund). However, if the amount is paid as a superannuation income stream, there are further restrictions if the recipient of the benefit is a child of the
deceased person.

The restrictions are that the child must be less than 18 years of age or, if more than 18 years of age, the child was financially dependant on the deceased person and is less than 25
years of age. Further, when the child reaches the age of 25, the benefit must then be “commuted” and the total remaining amount paid out as a lump sum.

There are exceptions to this for a child with a severe disability.

If the superannuation death benefit is paid to the estate of the deceased person and, if any tax is payable, it will be paid by the executor of the estate before any distribution to the
beneficiaries of the deceased person’s will. If the death benefit is paid directly to an individual, it will be the individual that pays the tax, if there is any tax applicable.

The taxation of superannuation death benefits is a complex topic and can’t be fully explained
here. The tax impost, if any, is determined by a number of issues that include:

  • Whether the benefit is paid as a lump sum or a pension
  • Whether the beneficiaries are dependants for taxation purposes
  • The age of the deceased individual when they die
  • The age of the recipient of the benefit
  • Whether the benefits are being paid out of the taxable or tax-free component of the superannuation fund

Superannuation death benefits paid to death benefits dependants are often not subject to any tax. Taxation is likely to be payable on some part of the payout if the death benefit is
received by an individual, or entity, that is not a death benefits dependant. It is often the case that adult children are not death benefits dependants. If taxation does arise on the payment
of a superannuation death benefit, it is often the case that a tax offset is available to reduce
the tax impost.

Estate planning and the taxation of superannuation death benefits is a specialist area requiring advice from professionals that include accountants, financial advisers and lawyers.