There is a significant misunderstanding on who is eligible to receive a deceased person’s superannuation death benefits, and how they are taxed upon receipt.

In this article, we will explore:

  • Who qualifies as a dependent for superannuation purposes
  • Who qualifies as a dependent for taxation purposes
  • The taxation implications of receiving a death benefit

1. Who is a Dependent for Superannuation Purposes?

The first step in this process is understanding that only a “dependent” is eligible to receive a deceased person’s superannuation benefits. For superannuation purposes, a dependent of a deceased person is defined as any of the following:

  • The deceased person’s spouse
  • The deceased person’s child
  • Someone with whom the deceased person shares an interdependent relationship
Definition of Spouse

A spouse of the deceased, for superannuation purposes, includes:

  • A person (of the same or opposite sex) in a registered relationship under the laws of a State or Territory
  • A person who, although not legally married to the deceased, lived with them on a genuine domestic basis as a couple
Definition of Child

A child of the deceased, for superannuation purposes, includes:

  • An adopted child, stepchild, or ex-nuptial child of the deceased
  • A child of the deceased’s spouse
  • Someone considered a child of the deceased under the Family Law Act 1975
Definition of an Interdependent Relationship

Two individuals are considered to have an interdependent relationship if:

  • They have a close personal relationship
  • They live together
  • One or both provide financial support to the other
  • One or both provide domestic support and personal care to the other

It’s important to note that all of the above must be passed to satisfy the definition. Furthermore, there must be more than a basic level of support. While this can be challenging to prove, it is becoming increasingly relevant with Australia’s ageing population, as adult children often care for elderly parents.

Once it is established whether someone qualifies as a dependent, the next step is to explore the taxation treatment of benefits received by eligible dependents.

2. Who is a Dependent for Taxation Purposes?

For taxation purposes, a dependant is referred to as a ‘death benefits dependant’ and includes:

  • The deceased person’s spouse or former spouse;
  • The deceased person’s child, if they are under 18 years of age;
  • A person with whom the deceased had an interdependency relationship just before passing away; or
  • Any other person who was a dependent of the deceased before their death.

A key distinction between the two definitions is that, for superannuation purposes, a child of any age can be a dependent. However, for taxation purposes, only children under 18 are considered death benefits dependants. This means an adult child is not classified as a death benefits dependant and may be taxed on some or all of the death benefits they receive.

The definition of an interdependency relationship is similar under both superannuation and taxation rules. As mentioned in Part One, interdependency relationships between adult children and elderly parents are becoming more common in Australia’s ageing population. Such relationships, when they meet both superannuation and taxation definitions, can lead to significant tax savings on death benefit payouts.

The implications of whether a person is a death benefits dependant or isn’t can lead to significant taxation differences upon their receipt of such payment and explored further in part three and four.

It should be noted that a deceased person’s death benefits which are ‘tax-free’, will be tax-free to the recipient regardless of whether they are a death benefits dependant or not.

So, the taxation consequences are only focused on the components of the deceased’s benefits which are ‘taxable’.

3. Taxation implications of death benefits received

This third and final part of the series explores the tax consequences when a death benefits dependant receives a death benefit payment from a deceased person.

Under superannuation legislation, a dependant can receive a death benefit payment in one of the following ways:

  • As a single lump sum;
  • As an interim lump sum followed by a final lump sum;
  • As an income stream (pension); or
  • As a combination of these options.
Lump Sum Payments

If the beneficiary receives the death benefit as a lump sum, the entire payment is tax-free.

Income Stream Payments

If the death benefit is received as an income stream (pension), the tax implications are more complex.

As such, the below table has been prepared to assist:

Tax-free ComponentTaxable (taxed) componentTaxable (untaxed) component
Beneficiary is 60 years or older OR deceased was 60 or older0%0%Beneficiary’s marginal tax rate (10% offset)
Beneficiary and deceased are both under the age of 600%Beneficiary’s marginal tax rate (15% offset)Beneficiary’s marginal tax rate
Non-Dependants and Taxation

When the beneficiary of a superannuation death benefit is not classified as a death benefits dependant, they can only receive the death benefit as a lump sum.

For non-dependants:

  • Tax-free components of the lump sum remain tax-free.
  • Taxable components are taxed at 15%.
  • Untaxed components are taxed at 30%.

Talk to us about your needs

Dealing with a deceased’s superannuation benefits can be complex. If you have any questions on any of the issues raised in this series, please contact Daniel Shaw of this office who can assist with your enquiries.

The information provided does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.