On the death of a superannuation fund member, the fund trustee is required to pay a death benefit as soon as is practical. In the majority of cases, this will require the fund trustee to receive: a notification of the member’s death; a death benefit payment request along with any AML/CTF requirements; a copy of the death certificate and Will; and a copy of grant of probate or letters of administration. This, combined with a valid nomination, should ensure the payment occurs without significant delay.
Because superannuation is not an estate asset, it will not be automatically distributed as per the terms of the deceased’s Will. Where the deceased’s intention was for their Will to distribute any superannuation proceeds, this can only occur if the superannuation fund trustee pays the proceeds to the deceased’s estate or their legal personal representative (LPR).
Who is eligible to receive a death benefit?
Superannuation Industry (Supervision) Act 1993 (SISA) restricts eligibility for a Superannuation Dependant to receive a death benefit (see Table 1). In addition to this list, a trustee may pay a benefit to the member’s estate or LPR.
How can a death benefit be paid?
Broadly, a superannuation death benefit can be paid as a lump sum or an income stream subject to eligibility (see Table 2). The death of a superannuation fund member is a compulsory cashing event for a superannuation trustee — see Superannuation Industry (Superannuation) Regulations 1994 (SISR) 6.21. In essence, this does not permit a death benefit to be rolled over to a beneficiary’s superannuation account in order to be retained in the accumulation environment.
It should be noted where a superannuation death benefit is paid to a beneficiary as an income stream and is subsequently commuted within six months of the date of death or three months after grant of probate or letters of administration (whichever is later), the commutation will continue to be treated as a death benefit payment and cannot be commuted and retained in the superannuation accumulation environment until that period has lapsed.
As detailed in Table 2, not all superannuation dependants are able to receive a death benefit as a superannuation income stream. SISR 6.21(2A) limits the ability for a death benefit to be paid as an income stream to a child under 18 years of age, or to a financially dependant child who is under 25, or to a child who is disabled irrespective of their age. Where a child (excluding a child who is disabled) initially met the conditions to establish an income stream, the income stream has a finite payment period because it must be cashed before they reach 25 years of age.
The increased lump-sum death benefit
While not a requirement, a superannuation fund trustee is able to pay an additional amount (commonly referred to as an anti-detriment amount) and increase a death benefit payment where a lump sum is being paid to a spouse (including defacto), former spouse or a child of the deceased. In summary, the anti-detriment amount aims to refund the tax deducted from the members’ superannuation account.
The amount of the benefit can be calculated using an audit method (ie, summing all the tax payments deducted from the members’ account), but because superannuation accounts are transferred between funds this may almost be an impossible task. Therefore, the following ATO accepted formula (ATO ID 2007/219) is generally used:
Tax Benefit = (0.15 x P x C) / (R — 0.15 x P)
P = Member service period in R which occurs after June 30, 1988.
R = Member service post June 30, 1983.
C = The taxable component of the lump sum death benefit reduced for any insured amount included for which deductions have been claimed.
Where no pre July 1, 1988 service exits, as R will equal P, the formula simplifies to 17.647 per cent x C. Importantly, this tax benefit will form part of the taxable component of the superannuation death benefit lump sum amount.
Death benefits and tax
The taxation of a superannuation death benefit is influenced by who is receiving the payment, the superannuation components and the method of payment (as summarised in Tables 3 and 4).
Andrew Biviano is technical services and paraplanning manager at Fiducian Portfolio Services.