Welcome to my weekly Insights blog. Once a week, we cover topics such as wealth creation, super, estate planning and tax. This is Part 3 of our 10-part series on how wealthy Australian families build, protect and pass on their wealth.
Many people carefully write a Will, assuming it covers everything they own. But for most Australians, one of their largest assets isn’t covered at all: their super.
Super is held in trust by your fund’s trustee, not owned by you directly. When you die, the trustee decides who receives it, unless you’ve given them a valid instruction. Getting this wrong can send your super to the wrong person, or cost your family tens of thousands of dollars in avoidable tax.
Key takeaways
- Your Will does not control your super. Your fund’s trustee decides who receives it unless you’ve made a valid binding nomination.
- A binding death benefit nomination (BDBN) tells the trustee exactly who to pay. Many lapse after three years unless they’re non-lapsing.
- Super can only be paid to your dependants or your estate. Adult children usually count as dependants for this purpose, but not for tax.
- Super paid to adult children who weren’t financially dependent on you is often taxed at up to 17% on the taxable component, plus more if it includes an untaxed element.
- Strategies such as a recontribution strategy and well-timed withdrawals can reduce that tax.
Why your Will doesn’t cover your super
Your Will deals with assets you own personally. Super is different: it’s held by the trustee of your fund under the fund’s trust deed and super law. When you die, your super doesn’t automatically pass to your estate.
Instead, the trustee pays your death benefit to one or more of your dependants, or to your legal personal representative (the executor of your estate). If you haven’t left a binding instruction, the trustee uses its discretion. That can lead to outcomes you didn’t intend, especially in blended families.
Your options for directing your super
| Option | How it works | Certainty |
|---|---|---|
| No nomination | The trustee decides who to pay, following the fund’s rules | Low |
| Non-binding nomination | You state your wishes, but the trustee can still decide otherwise | Low to medium |
| Binding death benefit nomination | The trustee must pay the people you name, if the nomination is valid | High, while it stays valid |
| Reversionary pension | Your account-based pension continues automatically to a nominated person, usually your spouse | High |
A binding nomination must be signed and witnessed correctly, and can only name eligible people. In many retail and industry funds, it lapses after three years unless the fund offers a non-lapsing version. In an SMSF, the rules depend on the fund’s trust deed, so the deed and the nomination need to match.
Who can receive your super
Super law only allows your death benefit to be paid to:
- Your spouse, including a de facto partner
- Your children, of any age
- Anyone who was financially dependent on you, or in an interdependency relationship with you
- Your estate, via your legal personal representative
If you want super to go to someone else, such as a sibling or grandchild who isn’t financially dependent on you, it generally has to be paid to your estate first and then dealt with under your Will. Paying super to your estate also lets it flow into a testamentary trust, which we’ll cover in Part 5.
The “death tax” on super
Australia doesn’t have an inheritance tax, but super comes close. Whether tax applies depends on who receives it, and that’s based on a different definition of “dependant” than the one above.
Tax-free: death benefits paid to a spouse or former spouse, a child under 18, or someone financially dependent on you or in an interdependency relationship.
Taxed: death benefits paid to adult children who weren’t financially dependent on you. The taxable component is generally taxed at up to 15% plus the 2% Medicare levy, and up to 30% plus Medicare levy on any untaxed element. If the benefit is paid through your estate, the Medicare levy doesn’t apply.
On a $600,000 super balance that is mostly taxable component, that can mean around $100,000 in tax for adult children. For many families, it’s the single largest tax bill in the whole estate.
How families plan around it
- Recontribution strategy. Once you meet a condition of release, such as retiring after 60, you may be able to withdraw super tax-free and recontribute it as a non-concessional contribution. That converts taxable component into tax-free component, which adult children receive tax-free. Contribution caps and your total super balance limit how much you can do.
- Withdrawing before death. If someone is terminally ill or very elderly, withdrawing super while they’re alive can avoid the death benefits tax entirely, because withdrawals after 60 are generally tax-free. This needs careful timing and an enduring power of attorney if capacity is a concern.
- Directing super to tax dependants. Paying super to a spouse, and leaving other assets to adult children, can sometimes reduce the overall tax.
- Keeping nominations current. Review nominations after any major life event, such as marriage, separation, a new child or a death in the family.
Frequently asked questions
Does my Will cover my superannuation in Australia?
No. Super is held by your fund’s trustee and is only dealt with by your Will if it’s paid to your estate. Use a binding death benefit nomination, or a reversionary pension, to control where it goes.
Do adult children pay tax on inherited super?
Usually yes, unless they were financially dependent on you. The taxable component is generally taxed at up to 15% plus the Medicare levy, or more if it includes an untaxed element. The tax-free component is not taxed.
How long does a binding death benefit nomination last?
In many funds, a binding nomination lapses after three years unless you renew it. Some funds, and many SMSFs, allow non-lapsing nominations. Check with your fund, or your SMSF trust deed.
Check your super is going where you want
Wealthy families treat their super nominations as carefully as their Will. A five-minute check of your fund’s nomination, and a conversation about the tax your children might pay, can save your family a great deal later.
At TaxAssist Accountants Dee Why, we help Northern Beaches families and SMSF trustees review death benefit nominations, reversionary pensions and recontribution strategies. Call us on (02) 9045 1511 or email [email protected] to book a review.
This article contains general information only and does not take into account your personal circumstances. It is not legal or financial product advice. Please speak with a qualified adviser before making decisions about your super or estate plan.
