Superannuation Estate Planning – Part 2 : Humphrey Partners

Superannuation Estate Planning – Part 2

Tax Dependants

As detailed in part 1 of our Superannuation Estate Planning series, superannuation death benefits can only be paid to a member’s legal personal representative(s) -LPR- and/or their dependants as defined by the Superannuation legislation (SIS). Although these parties may qualify as a superannuation dependant the benefit may be subject to tax. The tax treatment of death benefit payments relies upon whether the beneficiary qualifies as a dependant for tax purposes. The below table summarises both Superannuation (SIS) dependants and tax dependants.

Classification	SIS Laws	Tax Laws
Spouse	YES	YES
Former Spouse	NO	YES
Child^ under 18	YES	YES
Child age 18 or more	YES	NO
Person in interdependency relationship	YES	YES
Other (i.e. people whom recieve lump sum benefit in relation to death in the line of duty)	NO	YES

* a person whom identifies as being in a domestic relationship, or has registered the relationship under state/territory law (inclusive of same-sex couples)

^ includes adoptive, step, ex-nuptial and spouse’s children

Lump Sum Death Benefits

The tax-free component of a lump sum death benefit is non-assessable, non-exempt income (NANE) for both dependant and non-dependant tax beneficiaries. The taxable component is taxed as follows:

Beneficiary (Tax Definition)	Taxable Component
Beneficiary (Tax Definition)	Element Taxed	Element untaxed
Dependant	NANE
Non-dependant	15%*	30%*

*plus Medicare levy if the death benefit is not paid via the deceased’s estate

Also, it is important to note that untaxed elements are typically created when life insurance proceeds form part of a lump sum.

Death Benefit Income Streams

A death benefit can be paid as a pension/income stream if the recipient is:

A SIS dependant who is not a child of the deceased, including:
a spouse
an ‘ordinary meaning’ dependant (somebody whom relies financially on the deceased)
a person in an interdependency relationship, or
*a child who is:**
less than age 18
age 18 – 24 inclusive and financially dependent on the deceased, or
age 18 or more and has a qualifying disability

*A death benefit pension paid to a child must cease by age 25 unless the child has a qualifying disability

The tax free component of a death benefit income stream is non-assessable, non-exempt (NANE) income regardless of age. The taxable component is taxed as follows:

Beneficiary (Tax Definition)	Taxable Component
Beneficiary (Tax Definition)	Element Taxed	Element Untaxed
Deceased and Dependant less than age 60	Marginal tax rate* less 15% tax offset	Marginal tax rate*
Deceased or Dependant age 60 or more	NANE	Marginal tax rate* less 10% tax offset

*plus Medicare levy

Our Comments

Good estate planning should always minimise taxation, however not at the expense of correctly adhering to the deceased’s wishes. As an example, where the deceased wants their death benefit to be paid as a lump sum to a non-tax dependant, it may make sense to pay the death benefit via the deceased estate so that the 2% Medicare levy is avoided. However, attempting to save the 2% tax levy could prove to be a very costly exercise if the estate is open to a family provision claim. Also, depending on the age and/or the health of the superannuation member, there may be proactive strategies that should be considered to minimise superannuation death taxes.

By: Humphrey Partners December 22, 2015 Superannuation, Estate Planning Tags: Superannuation, EstatePlanning, Tax;

Superannuation Estate Planning – Part 2