Superannuation death benefits tax
Tax payable when super passes to non-dependants such as adult children, charged on the taxable component.
Super paid to a tax dependant — a spouse, a child under 18, or someone in an interdependency relationship — is generally tax-free regardless of components.
Paid to a non-dependant, most commonly an independent adult child, the taxable component is taxed at 15% plus Medicare levy, and any untaxed element at 30% plus levy. The tax-free component always passes free of tax.
This is why the split between components matters so much in estate planning. Two identical balances can produce very different outcomes for beneficiaries depending on their composition.
What it can cost
A $500,000 balance that is entirely taxable component, left to an adult child, can attract around $85,000 of tax including Medicare levy. Left to a spouse it would be tax-free.
The bit people get wrong
A recontribution strategy — withdrawing and recontributing as a non-concessional contribution — can convert taxable component into tax-free component while you are alive. It must be done well before it is needed.
Common questions
Are adult children dependants?
Not usually for tax purposes once they are financially independent and over 18, even though they may be beneficiaries under your nomination.
How do I avoid the tax?
Options include recontribution strategies, withdrawing benefits before death where practical, and directing benefits to a tax dependant. Advice is worthwhile given the sums involved.
Does a binding nomination change the tax?
No. A nomination controls who receives the money, not how it is taxed. The tax depends on the recipient's dependency status and the components paid.