Death and taxes


Did you know that millions of Australians' superannuation may be taxable upon death?

Key Points


  • Death taxes were abolished in the 1970s.
  • When the super account holder dies, tax may apply.
  • ‘Married’ status and dependants are important factors.

That news may come as a shock, as most of us thought death taxes were abolished in the late 1970s.

Whether tax is levied on your super when you die can depend on your marital status and whether you have 'dependants' (that is children or someone else who lives with you and financially depends on you).

Super death benefits


When a person dies, in most cases, their super provider 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 provider allow it, you can nominate the beneficiary for your super with your provider. This nomination may be non-binding or binding.

If a binding death benefit nomination is allowed, you can nominate one or more dependants or your legal personal representative to receive your super.

If a deceased person did not make a nomination, the trustee of the provider may:

  • Use their discretion to decide which dependant or dependants the death benefit is paid to
  • Make a payment to the deceased's legal personal representative (executor of the deceased estate) for distribution according to the instructions in the will. 

If a non-binding nomination was made by the deceased, the trustee of the provider may:

  • Use their discretion to pay in accordance with the non-binding nomination
  • Make a payment to the deceased's legal personal representative (executor of the deceased estate) for distribution according to the instructions in the will. 

You can contact your provider to find out more on death benefit nominations.

Australian Tax Office gets its cut


If you are single and childless, and no one else depends on you, your super money will be taxed before being handed to the person you nominate to receive it — assuming you nominated someone prior to your death to get the money.

If you've got hundreds of thousands of dollars in your retirement savings and die, that money will be taxed up to 32% before the remaining portion is transferred to your nominated beneficiaries.

However, married people, those in a de facto arrangement, and those with dependent children don't face the same tax consequence in the event of their death.

Note: Financially dependent means that a child or adult (e.g. person with a permanent disability) relies on them for necessary financial support.

Tax rate applied to super payments upon death differs


The amount of tax levied before funds are transferred to any nominated, non-dependant beneficiary depends on a few factors.

Assuming you have nominated one or more beneficiaries, they are not dependants and they are to be given your super as a lump-sum payment upon your death, the payment from your super may be subject to tax.

Super that is tax-free when withdrawn is known as the 'tax-free component' of your super. Super that is taxable when withdrawn is known as the 'taxable component' of your super.

The taxable component (you can check with your super fund to find out if the full amount is taxable) then has a taxed and untaxed element.

The taxed element will be subject to either your marginal tax rate or 17% (whichever is lower) and includes the Medicare levy.

Meanwhile, the untaxed element will be subject to either your marginal tax rate or 32% (whichever is lower) and includes the Medicare levy.

You can contact your super fund to nominate beneficiaries and check what tax rate would apply upon your death.

You can find out more from the Australian Taxation Office (ATO) website or seek financial advice on whether you can convert your taxable component into a non-taxable component.  

This can be done via a recontribution strategy, which involves withdrawing a lump sum, paying any necessary tax on the withdrawal and recontributing these funds into superannuation as a non-concessional contribution.

The revised superannuation balance will potentially consist of all, or more of, a tax-free component.

However, the recontribution strategy may not be effective for everyone. It is generally most effective if you're aged over 60 and not liable for tax on the withdrawal.

Source: ABC & ATO