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Death & Taxes

Death & Taxes

by Abra Chowdhury & Mark Phillips

On the death of a member their superannuation benefits must be dealt with or paid out as soon as practicable. The ATO normally expect this to be within a period of 6 months unless there are extenuating circumstances. The potential recipient(s) of a death benefit can include one or more dependents, the deceased’s legal personal representative and even a non-dependent.

There are 2 definitions of dependent that are important:

Under superannuation law a dependent is:

  1. A spouse or de facto
  2. A child of any age
  3. A person in an interdependency relationship.

Under taxation law a dependent is:

  1. A spouse, including a de facto or former spouse
  2. A child under 18
  3. A financial dependent
  4. A person in an interdependency relationship.

A death benefit can be paid to a dependent as a lump sum or an income stream. However, under tax law, an adult child can only receive an income stream if they are aged below 25 and were financially dependent on the deceased or have a permanent disability. Benefits paid to a non-dependent can only be paid as a lump sum.

The following tax rates apply to death benefits paid to a tax dependent: 

Deceased Age

Death Benefit Payment

Beneficiary Age

Tax on Taxed Element

Tax on Tax Free Element

Any Age

Lump Sum

Any

0%

0%

Aged 60 and above

Income Stream

Any

0%

0%

Below Age 60

Income Stream

Age 60 and +

0%

0%

Below Age 60

Income Stream

Below Age 60

MTR1 less 15% tax offset

0%

1MTR – Marginal Tax Rate

The following tax rates apply to death benefits paid to a tax non-dependant.

Deceased Age

Death Benefit Payment

Beneficiary Age

Tax on Taxed Element

Tax on Tax Free Element

Any Age

Lump Sum

Any

15%

0%

Death benefit payments are classified as Australian source income, if a death beneficiary is a foreign resident for Australian tax purposes, they receive the same tax treatment but are exempt from Medicare levy.

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