Tax and the super afterlife

Michelle McVeigh • April 26, 2017

Death and taxes are never pleasant topics to think about, but a little careful consideration now could save the people who will inherit your superannuation savings as a big tax bill. Many people assume there’s no tax payable on super death benefits, and in some circumstances this will be the case. But tax may be payable at varying rates depending on who receives the death benefit and in what form it’s received. Careful planning of who gets the various parts of your estate can potentially save thousands of dollars in unnecessary tax.

Super and your Will

The total amount of super death benefit paid out to your beneficiaries will include money left in your super account at the time of your death plus the value of any life insurance you held inside your super.

Although super death benefits are distributed to your beneficiaries when you die, they do not form part of your estate and are not covered by your Will – unlike other assets such as your home.

The trustee of your super fund decides who receives your death benefit and although your Will may be used as a guide, the trustee is not bound by it.

To help ensure the trustee pays your death benefit to the right person, you need to nominate your preferred beneficiaries. If your fund allows it, consider making a binding nomination as this instructs and binds the fund trustee to pay your death benefit to a specific person or, alternatively, to the executor of your estate. Death benefits left to your executor can then be distributed as set out in your Will. Binding nominations need to be renewed every three years to remain valid.

Tax and super death benefits

Just to complicate matters, the definition of a dependent is slightly different under super law and tax law. Under super law, a dependent can be a spouse (including de facto and same sex partners), a child of any age or a person who was financially dependent on the deceased. Under tax law, adult children over 18 are not considered dependents unless they were in an interdependency relationship with the deceased at the time of death.

As a general rule of thumb, super death benefits paid to dependants under tax law are tax free ͥ, but death benefits paid to non-dependants such as adult children are taxed and can only be received as a lump sum.

Factors such as whether the components of the benefit are tax-free or taxable, the age of the member at the time of their death, and whether the benefit is paid as a lump sum or as an income stream also affect how the benefit is taxed.

Special rules apply if a death benefit is paid to the executor of a deceased estate.

Lump sum or income stream?

Super fund members can instruct the trustee to pay an income stream to their dependants, but the tax imposed will vary with the age of the deceased and the recipient. Generally, the tax exempt component of the income stream is tax free, but the untaxed element is taxed at the recipient’s marginal tax rate less a tax offset. The exception is if both the deceased and recipient are aged under 60.

If the super death benefit is paid as an income stream to a child, pension payments must cease at age 25 (unless they are permanently disabled), with the remainder paid as a lump sum.

Taxation treatment of super death benefit paid as a lump sum

Note: The taxation rate applying to income stream benefits paid to dependants and non-dependants is different.

Existing pension payments

Normally a pre-existing super pension stops when the member receiving it dies, but if the super fund’s rules permit it, a ‘reversionary pension’ may be redirected to a dependant, usually the spouse.

The tax rate imposed on these reversionary pensions depends on the age of the deceased and the recipient.

Impact of July 2017 reforms

The upcoming changes to the super system will also affect the payment of super death benefits. Currently, some super funds (including SMSFs) have the option to increase a death benefit by making an anti-detriment payment.ͥ ͥ

These lump sum benefits act as a refund for the 15 per cent contributions tax paid by a super fund member during their lifetime. Anti-detriment payments are paid to an eligible dependant who was a spouse or former spouse, a child (including an adult child), or trustee of the deceased’s estate.

From 1 July 2017, the use of anti-detriment payments will be scrapped as part of the government’s reforms to the super system.

The treatment of super death benefits is complex and often causes confusion. If you want your beneficiaries to receive their inheritance in the most tax effective manner, then you need to give careful thought to your overall estate plan well in advance. For example, you may decide to leave super death benefits to your spouse and non-super assets to your adult children or grandchildren.

If you would like to discuss the tax implications of your super death benefits, call our office today.

 

i www.ato.gov.au/individuals/super/super-and-tax/tax-on-benefits/

ii www.ato.gov.au/super/apra-regulated-funds/paying-benefits/paying-superannuation-death-benefits/

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Do you know how your super is performing?

By Nikki Ashurst • November 2, 2026
Many Australians don't know how their super fund has performed or what it invests in. Are you one of them? Here's what to check and why it matters. Do you know how your super fund performed over the last two years? Many Australians don’t and are working towards their financial future without fully understanding one of their most important assets and without a clear plan for how their super may support them in retirement. That's not surprising, as many people view super as something that should run quietly in the background while they're busy with careers, families and everything else that life throws at them. But when you’re not sure what’s happening behind your balance, it’s harder to know whether you’re on track, whether your current approach reflects your goals or what opportunities might be available to help you make the most of what you’ve built so far. Your super isn't sitting in an account, it's invested Super is invested by a fund on your behalf across a mix of assets, with those investments working to grow your balance over time. Those include: Shares Ownership in Australian and international publicly listed companies. Their value can rise and fall, sometimes substantially over short periods but shares can provide capital growth over the long term. Property and infrastructure Real assets like office buildings, shopping centres, airports and energy networks. They can produce income and don't always behave in the same way as share markets, helping diversify investment holdings. Fixed interest and bonds Lending to governments and companies in return for interest. They can provide regular income and be steadier than shares, although returns and risk vary depending on the investment. Cash Generally, the most stable and lowest risk investment type. It can provide stability and faster access to money but typically offers lower longer term return potential. The investment option you choose determines the mix of assets held in your super based on your risk appetite. Most super funds offer options from conservative to high growth. If you’re young, a growth option with a higher exposure to growth assets like shares could offer higher returns over time – but it also comes with higher risk. As retirement nears, you might want to consider a more conservative approach with more defensive assets, like bonds for example to protect your savings. If you've never made a choice, you're probably in your fund's default option, which is designed to suit a broad membership. It’s worth knowing whether the mix you're in matches your circumstances and goals, including how far you are from retirement. Why performance alone is not a true comparison If you're thinking about how your super compares, returns are often where people start. The trouble is that a return figure means nothing without context: What it's being compared to Growth and conservative options invest differently and with different levels of risk. Compare like with like or the comparison may not be genuine. The comparison period A single year can be heavily influenced by short term market conditions. Super is measured in decades, so five, seven and ten year returns tell you far more about whether a fund is consistently doing its job, albeit not a predictor of future performance. Fees and tax Published returns should reflect investment fees, costs and tax but administration fees may be charged separately from your balance. Two funds quoting the same return can leave you in meaningfully different places once all fees are accounted for. Then there are the things that returns can't show you at all. For example, what insurance is attached to your account and what it's costing you, whether the fund offers guidance, tools and advice or simply sends a statement once a year. Another consideration maybe the level of support available when you need it. When comparing funds, it's worth looking at the full picture, including performance, fees, investment options, retirement support and member benefits. What today’s decisions mean tomorrow To understand how your super stacks up, start here: Find your investment option It's on your annual statement and in your online account. Look at what's in it Your fund publishes the asset allocation (shares, cash etc.) for each investment option. Check the long-term return for that option Focus on five and ten year returns, not just last year and compare them with equivalent options. Understand the total cost Add together administration fees, investment fees and insurance premiums as an annual dollar figure. Comparing super is about working out which option will perform best for you. Before you jump in, it’s worth understanding what's behind the numbers so you can make decisions based on more than a headline return. Knowing where you stand is the first step A super balance tells you where you are today. Understanding how your super is invested, how it compares and whether it's aligned with your goals helps show whether you're heading in the right direction. Source: MLC The information in this article does not take into account your objectives, needs and circumstances. We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this document. Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives gives any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of the information contained in this document. Principal Wealth Management Pty Ltd trading as BMO Financial Solutions ABN 53 109 336 601 is a Corporate Authorised Representative (CAR 277821) of Capstone Financial Planning Pty Ltd ABN 24 093 733 969 Australian Financial Services Licence (AFSL) No. 223135.

The SMSF landscape is changing

By Jude Schofield • October 7, 2026
More Australians are choosing to take direct control of their retirement savings by establishing a self-managed super fund (SMSF) and according to the SMSF Association, Aussies now see their super as an important part of building and managing their overall wealth.