What you need to know about receiving a superannuation death benefit after someone has died.
When a person dies, what happens to their super?
When a person dies, in most cases their super fund pays their remaining super to their nominated beneficiary.
Super paid after a person’s death is called a ‘super death benefit’.
If the rules of your super fund allow it, you can nominate the beneficiary for your super, by making a non-binding or binding nomination.
If the super fund rules allow a binding death benefit nomination, you can nominate one or more dependents and/or your legal personal representative to receive your super.
If a deceased person did not make a nomination, or has made a non-binding nomination, the trustee of the fund may:
- use their discretion to decide which dependents or dependents to pay the death benefit to
- make a payment to the deceased’s legal personal representative (executor of their estate) for distribution according to the instructions in the deceased’s will.
Contact your super fund to find out more about death benefit nominations.
If a death benefit is paid to a dependent of the deceased, it can be paid as either a lump sum or income stream.
If a death benefit is paid to someone who is not a dependent, it must be paid as a lump sum.
Who is a dependent?
Superannuation law sets out who a death benefit is payable to, while taxation law sets out how a death benefit is taxed.
Dependent under superannuation law
For the purposes of deciding who receives a death benefit, you’re a dependent of the deceased if at the time of their death you were:
- their spouse or de facto spouse
- a child of the deceased (any age)
- a person in an interdependency relationship with the deceased.
An interdependency relationship exists between two people if all of the following conditions are met:
- they have a close personal relationship
- they live together
- one or both provides the other with financial support
- one or both provides the other with domestic support and personal care.
If you would like to leave your super to someone who is not a dependent under superannuation law, ask your super fund about making a binding death benefit nomination to have the payment made to your legal personal representative. This will ensure your super is distributed according to your will.
Dependent under tax law
For tax purposes, you are a dependent of the deceased if at the time of their death you were:
- their spouse or de facto spouse (of any sex)
- a former spouse or de facto spouse (of any sex)
- a child of the deceased under 18 years old
- in an interdependency relationship with the deceased
- any other person dependent on the deceased.
The conditions for the existence of an interdependency relationship under tax law are generally the same as those applying under superannuation law.
However, two people may also have an interdependency relationship for tax purposes if they have a close personal relationship, and the reason they don’t satisfy one or more of the requirements listed above is that one or both suffer from a physical, intellectual or psychiatric disability.
Being financially dependent on the deceased means you relied on them for necessary financial support. Children over 18 years old must be financially dependent on the deceased to be considered a dependent.
There are limits on who can receive a death benefit income stream. Children can only receive an income stream if they are under 18, or under 25 years old and are financially dependent on the deceased or have a permanent disability.
Adult children with a permanent disability can continue to receive an income stream after they turn 25 years old. In all other situations the income stream must change to a lump sum on or before the date they turn 25 years old.
For more information, see Tax on super benefits.
How to apply for a super death benefit
If you believe you’re the beneficiary of a deceased person’s super or are the legal representative of a person’s estate, you should contact their super fund to let them know that the person has died and ask them to release the person’s super.
You can also check if the deceased had ATO-held super.
Death benefit income streams
A super income stream involves a series of regular payments from a super fund (at least annually), drawn from a retirement account.
Death benefit income streams and your transfer balance cap
There is a lifetime limit (your transfer balance cap) on the maximum amount you can transfer into one or more tax-free retirement accounts.
Special rules apply to death benefit income streams.
If you’re receiving a death benefit income stream – either by itself or in combination with another super income stream – you need to ensure you don’t exceed your personal transfer balance cap.
Death benefits can be rolled into another fund. However, the new fund must start a death benefit income stream or pay the amount out of super as a lump sum (or a combination of these). The death benefit cannot be retained in accumulation phase. Death benefits that are rolled over will not lose their death benefit tax treatment.
Credits to your transfer balance account
If you start to receive a death benefit income stream, a credit arises in your transfer balance account. The amount and timing of the credit depends on when you started receiving the death benefit income stream, and whether it’s reversionary or non-reversionary.
Reversionary death benefit income streams
If you’re a beneficiary of a reversionary death benefit income stream, you automatically become entitled to the income stream on the death of the original member. The date of death of the original member is when the income stream first becomes payable to you.
Before 1 July 2017
If you were entitled to a reversionary death benefit income stream before 1 July 2017, the credit in your transfer balance account arises on 1 July 2017 or 12 months after the death of the original member – whichever is the later. This means:
- if the member died before 1 July 2016, the credit in your transfer balance account arises on 1 July 2017
- if the member died between 1 July 2016 and 30 June 2017, the credit in your transfer balance account arises 12 months after the date of the member’s death.
On or after 1 July 2017
If you become entitled to a reversionary death benefit income stream on or after 1 July 2017, the credit in your transfer balance account arises 12 months after the date of the member’s death. The amount of the credit is equal to the value of the income stream at the date of the member’s death.
Non-reversionary death benefit income streams
If you’re a beneficiary of a non-reversionary death benefit income stream, you’re not automatically entitled to the income stream on the death of the original member. You become entitled when you start being paid the death benefit income stream.
The value of non-reversionary death benefit income streams may also include any:
- investment earnings that accrued to the deceased member’s interest between the date of death and the date you become entitled to the income stream
- other amounts the super fund has decided to pay as a death benefit income stream.
Before 1 July 2017
If you’re entitled to a non-reversionary death benefit income stream before 1 July 2017, the credit in your transfer balance account arises on 1 July 2017. The amount of the credit is equal to the value of your income stream at the end of 30 June 2017.
On or after 1 July 2017
If you become entitled to a non-reversionary death benefit income stream on or after 1 July 2017, the credit arises on the day you become entitled to the income stream. The amount of the credit is the value of the income stream on that day.
Defined benefit income streams
Some defined benefit income streams are treated differently for transfer balance cap purposes. This includes death benefit income streams that are also defined benefit income streams. They have a special value for transfer balance cap purposes.
The rules of your fund may specify that your death benefit income stream reduces if your circumstances change. For example:
- when a reversionary defined benefit pension is paid to a surviving spouse or a beneficiary – in some cases, the first payment is the full amount of the payment that was made to the deceased, whereas the second and all subsequent payments are a proportion of the full entitlement. As a result, the annualised payment is based on an inflated figure.
- when a reversionary defined benefit pension paid to a surviving spouse is calculated by reference to the deceased’s dependent children, and the surviving spouse’s entitlement is reduced as the children cease being dependent (generally at 18 or 25 years depending on their circumstances).
These reductions occur mainly with public sector superannuation schemes.
You may be entitled to a debit in your transfer balance account if your death benefit income stream reduces because of a change in your circumstances. You will need to contact your fund to know if this debit will apply to you.
The value of the debit is the special value of your lifetime pension or annuity just before the reduction in value less the special value of your lifetime pension or annuity just after the reduction in value.
Stay Compliant and Avoid ATO Scrutiny
At Omnis our SMSF team is highly skilled at navigating the complexities of SMSF regulations to help our clients achieve financial security and compliance. Contact us in West Perth on 08 9380 3555.
