“If you or I were to withdraw our super after we turn 60 it is tax-free, but it might not be the same case for your intended beneficiaries if it ends up being part of an estate,” Holloway said.
He explained that tax superannuation is treated differently depending on whether your super is paid as a lump sum, income stream or a mixture of both, and if your beneficiary or beneficiaries are classified as “tax-dependants”.
A tax-dependant includes a current spouse, including a de facto relationship, any children of the deceased who are under the age of 18, and those in an interdependency relationship with the deceased.
“If you’re a tax-dependent then you won’t pay any tax on the superannuation payment. However, if you’re a non-dependent and a superannuation beneficiary, for example a child of the deceased who is over 18, the tax treatment of these funds is broken into different elements,” he said.
This means that for a tax non-dependent, where the superannuation type income is a tax-free element (any after-tax contributions by the fund holder when they were alive) is 0 per cent. It is 15 per cent for a tax non-dependent with a taxed element including contributions and earnings taxed at 15 per cent inside the fund while the fund holder was alive.
For a tax non-dependent where the superannuation type income is an untaxed element such as an untaxed government superannuation fund while the fund holder was alive, it is 30 per cent, as it is for those receiving a life insurance payout inside super.
“If a superannuation death benefit gets paid into a deceased estate, the tax return is prepared as if no beneficiary was entitled and if there are non-dependent beneficiaries, the resulting tax is a debt of the estate,” Holloway said.
“Superannuation dependents, such as adult children, current spouses, current children, or people with an interdependent relationship with the deceased, can directly receive a superannuation death benefit.”
He warned that proving an interdependency relationship can be a difficult task. Adult next of kin helping out their parents during their life must make sure they keep track of expenses, as verification will be needed to prove interdependency to avoid a hefty tax bill.
“Interdependency and tax are interesting issues. We recently had a case where two adult children were caring for their father. Unfortunately, the two children didn’t keep the receipts, so the ATO didn’t proceed with their interdependency application as there was no proof of this type of relationship,” Holloway said.
“While they received the funds, they still had to pay tax on the proceeds.”
Finally, Holloway said superannuation is not automatically included in a deceased’s will and people need to give specific instructions for this to occur otherwise the super fund’s trustees may decide who receives the superannuation payout.
