Superannuation death benefits

What you need to know about receiving a superannuation death benefit after someone has died.

When a person dies, what happens to their super?

When a person dies, in most cases their super fund pays their remaining super to their nominated beneficiary.

Super paid after a person’s death is called a ‘super death benefit’.

If the rules of your super fund allow it, you can nominate the beneficiary for your super, by making a non-binding or binding nomination.

If the super fund rules allow a binding death benefit nomination, you can nominate one or more dependants and/or your legal personal representative to receive your super.

If a deceased person did not make a nomination, or has made a non-binding nomination, the trustee of the fund may:

• use their discretion to decide which dependent or dependents to pay the death benefit to
• make a payment to the deceased’s legal personal representative (executor of their estate) for distribution according to the instructions in the deceased’s will.

If a death benefit is paid to a dependent of the deceased, it can be paid as either a lump sum or income stream.

If a death benefit is paid to someone who is not a dependent, it must be paid as a lump sum.

Who is a dependent

Superannuation law sets out who a death benefit is payable to, while taxation law sets out how a death benefit is taxed.

Dependent under superannuation law

For the purposes of deciding who receives a death benefit, you’re a dependant of the deceased if at the time of their death you were:

• their spouse or de facto spouse
• a child of the deceased (any age)
• a person in an interdependency relationship with the deceased.

An interdependency relationship exists between two people if all of the following conditions are met:

• they have a close personal relationship
• they live together
• one or both provides the other with financial support
• one or both provides the other with domestic support and personal care.

If you would like to leave your super to someone who is not a dependant under superannuation law, ask your super fund about making a binding death benefit nomination to have the payment made to your legal personal representative. This will ensure your super is distributed according to your will.

Dependant under tax law

For tax purposes, you are a dependant of the deceased if at the time of their death you were:

• their spouse or de facto spouse (of any sex)
• a former spouse or de facto spouse (of any sex)
• a child of the deceased under 18 years old
• in an interdependency relationship with the deceased
• any other person dependant on the deceased.

The conditions for the existence of an interdependency relationship under tax law are generally the same as those applying under superannuation law.

However, 2 people may also have an interdependency relationship for tax purposes if they have a close personal relationship, and the reason they don’t satisfy one or more of the requirements listed above is that one or both suffer from a physical, intellectual or psychiatric disability.

Being financially dependent on the deceased means you relied on them for necessary financial support. Children over 18 years old must be financially dependent on the deceased to be considered a dependant.

There are limits on who can receive a death benefit income stream. Children can only receive an income stream if they are under 18, or under 25 years old and are financially dependent on the deceased or have a permanent disability.

Adult children with a permanent disability can continue to receive an income stream after they turn 25 years old. In all other situations the income stream must change to a lump sum on or before the date they turn 25 years old.

How to apply for a super death benefit

If you believe you’re the beneficiary of a deceased person’s super or are the legal representative of a person’s estate, you should contact their super fund to let them know that the person has died and ask them to release the person’s super.

You can also check if the deceased had ATO-held super.

Death benefit income streams

A super income stream involves a series of regular payments from a super fund (at least annually), drawn from a retirement account.

Death benefit income streams and your transfer balance cap

There is a lifetime limit (your transfer balance cap) on the maximum amount you can transfer into one or more tax-free retirement accounts.

Special rules apply to death benefit income streams.

If you’re receiving a death benefit income stream – either by itself or in combination with another super income stream – you need to ensure you don’t exceed your personal transfer balance cap.

Death benefits can be rolled into another fund. However, the new fund must start a death benefit income stream or pay the amount out of super as a lump sum (or a combination of these). The death benefit cannot be retained in accumulation phase. Death benefits that are rolled over will not lose their death benefit tax treatment.

Credits to your transfer balance account

If you start to receive a death benefit income stream, a credit arises in your transfer balance account. The amount and timing of the credit depends on when you started receiving the death benefit income stream, and whether it’s reversionary or non-reversionary.

Reversionary death benefit income streams

If you’re a beneficiary of a reversionary death benefit income stream, you automatically become entitled to the income stream on the death of the original member. The date of death of the original member is when the income stream first becomes payable to you.

Before 1 July 2017

If you were entitled to a reversionary death benefit income stream before 1 July 2017, the credit in your transfer balance account arises on 1 July 2017 or 12 months after the death of the original member – whichever is the later. This means:

• if the member died before 1 July 2016, the credit in your transfer balance account arises on 1 July 2017
• if the member died between 1 July 2016 and 30 June 2017, the credit in your transfer balance account arises 12 months after the date of the member’s death.

On or after 1 July 2017

If you become entitled to a reversionary death benefit income stream on or after 1 July 2017, the credit in your transfer balance account arises 12 months after the date of the member’s death. The amount of the credit is equal to the value of the income stream at the date of the member’s death.

Non-reversionary death benefit income streams

If you’re a beneficiary of a non-reversionary death benefit income stream, you’re not automatically entitled to the income stream on the death of the original member. You become entitled when you start being paid the death benefit income stream.

The value of non-reversionary death benefit income streams may also include any:

• investment earnings that accrued to the deceased member’s interest between the date of death and the date you become entitled to the income stream
• other amounts the super fund has decided to pay as a death benefit income stream.

Before 1 July 2017

If you’re entitled to a non-reversionary death benefit income stream before 1 July 2017, the credit in your transfer balance account arises on 1 July 2017. The amount of the credit is equal to the value of your income stream at the end of 30 June 2017.

On or after 1 July 2017

If you become entitled to a non-reversionary death benefit income stream on or after 1 July 2017, the credit arises on the day you become entitled to the income stream. The amount of the credit is the value of the income stream on that day.

Defined benefit income streams

Some defined benefit income streams are treated differently for transfer balance cap purposes. This includes death benefit income streams that are also defined benefit income streams. They have a special value for transfer balance cap purposes.

The rules of your fund may specify that your death benefit income stream reduces if your circumstances change. For example:

• when a reversionary defined benefit pension is paid to a surviving spouse or a beneficiary – in some cases, the first payment is the full amount of the payment that was made to the deceased, whereas the second and all subsequent payments are a proportion of the full entitlement. As a result, the annualised payment is based on an inflated figure.
• when a reversionary defined benefit pension paid to a surviving spouse is calculated by reference to the deceased’s dependent children, and the surviving spouse’s entitlement is reduced as the children cease being dependent (generally at 18 or 25 years depending on their circumstances).

These reductions occur mainly with public sector superannuation schemes.

You may be entitled to a debit in your transfer balance account if your death benefit income stream reduces because of a change in your circumstances. You will need to contact your fund to know if this debit will apply to you.

The value of the debit is the special value of your lifetime pension or annuity just before the reduction in value less the special value of your lifetime pension or annuity just after the reduction in value.

Child recipients of a death benefit income stream

How the transfer balance cap applies to child recipients

The transfer balance cap applies in a modified way to child recipients of death benefit income streams.

A person is a child recipient of a death benefit income stream if they’re receiving a death benefit income stream and are either:

• under 18 years old
• between 18 and 25 years old and were financially dependent on the deceased
• living with a permanent disability.

Each child recipient of a death benefit income stream from a deceased parent has a modified personal transfer balance cap.

The modified personal transfer balance cap depends on the deceased parent’s super interests and is made up of the total amount of ‘cap increments’ a child recipient is entitled to.

Child recipients are entitled to retain a super income stream (or streams) up to the amount of the cap increment (or increments) without exceeding their modified personal transfer balance cap.

The normal transfer balance rules apply if a child exceeds their modified personal transfer balance cap.

When the modified transfer balance cap arrangements cease

Unless the child recipient has a permanent disability, on turning 25 years old they are required to cash out all death benefit income streams and withdraw the capital from the super system. At this time, the modified transfer balance cap arrangements cease (unless the capital has already been exhausted).

Child recipients with a permanent disability are not subject to the cashing out rule. The modified transfer balance cap arrangements cease when all of the funds that support their death benefit income stream have been exhausted. An exception is if they also have other super income streams, such as a disability pension or an income stream funded by a structured settlement contribution.

If the child recipient subsequently starts receiving a super income stream (other than as a child recipient) they will start a new transfer balance account with a personal transfer balance cap based on the general transfer balance cap.

Recipient of another super income stream

If the child recipient also receives their own super income stream or another death benefit income stream (for example, from an interdependency relationship), their personal transfer balance cap is worked out differently. In this case, the cap is the sum of:

• the recipient’s personal transfer balance cap, worked out according to the general rules
• their modified personal transfer balance cap based on the total amount of cap increments they’re entitled to as a child recipient.

The death benefit income streams and related modified personal transfer balance cap are disregarded when calculating if the individual is entitled to proportional indexation of their personal transfer balance cap. The proportional indexation of their personal transfer balance cap is worked out according to the general rules.

For child recipients also receiving their own super income stream, their transfer balance account continues after the child recipient death benefit income stream has been cashed out or exhausted.

How do the cap increments work?

Child recipients who are only receiving death benefit income streams don’t have a personal transfer balance cap based on the general transfer balance cap. Instead, their modified personal transfer balance cap generally takes into account the value of the deceased parent’s retirement phase interests they receive. This is achieved through a series of transfer balance cap increments that accrue to the child recipient.

The cap increments depend on whether the child recipient starts receiving the death benefit income stream:

• before 1 July 2017
• on or after 1 July 2017.

Started receiving income stream before 1 July 2017

The cap increment for child recipients receiving death benefit income streams before 1 July 2017 is equal to the general transfer balance cap at the time, $1.6 million.

The cap increment arises on 1 July 2017 and means the child recipient can be receiving death benefit income streams of up to $1.6 million without exceeding their modified personal transfer balance cap.

Started receiving income stream on or after 1 July 2017

For child recipients who start to receive a death benefit income stream on or after 1 July 2017, the cap increment depends on the following circumstances:

• whether the deceased parent had a transfer balance account before they died
• if the deceased parent had a transfer balance account, the source of their super interest that the child recipient’s income stream comes from
• whether the deceased parent had a transfer balance account and also an excess transfer balance in the retirement phase just before they died.

A cap increment arises for each death benefit income stream received from a parent. If the child recipient starts to receive death benefit income streams because both their parents died, the modified personal transfer balance cap is the total of the cap increments worked out for each parent.

Each cap increment arises when the child recipient starts to be entitled to the death benefit income stream. However, in the case of a reversionary death benefit income stream, the cap increment is deferred for 12 months to align with the modifications for this type of death benefit income stream. Deceased parent had no transfer balance account

If the parent did not have a transfer balance account at the time of their death (for example, they died before they were in retirement phase), the child recipient will receive the death benefit income stream from the parent’s accumulation phase interest.

In this case, if the child recipient is the sole beneficiary of the super interest, their cap increment is equal to the general transfer balance cap at that time. If the child recipient is not the sole beneficiary of the super interest, their cap increment is a proportion of the general transfer balance cap at that time, reflecting their share of the parent’s super interests. Deceased parent had a transfer balance account

If the deceased parent had a transfer balance account before they died, the child recipient’s cap increment depends on the type of super interest their death benefit income stream comes from. This is because only death benefit income streams that come from a retirement phase interest of a deceased parent are entitled to a cap increment.

Generally, an amount is considered to be sourced from the deceased parent’s retirement phase interest if the amount came from super interests supporting income streams payable to them just before their death. This amount includes earnings accrued on those income streams after the parent’s death, up until a death benefit income stream is paid.

If the deceased parent only had a retirement phase interest, the child recipient’s cap increment is equal to the share of the deceased parent’s interest they’re receiving as a death benefit income stream. However, if the deceased parent had a transfer balance account, but the child recipient’s death benefit income stream comes from the parent’s accumulation interest, the cap increment is nil.

If the child recipient’s death benefit income stream is partially funded by a retirement phase interest and partially from an accumulation interest, the cap increment is limited to their share of the retirement phase interest. The benefit received from the deceased parent’s accumulation interest has a cap increment of nil. This means the child recipient will have an excess transfer balance (unless they also have a cap increment because of the death of another parent or unless they also have a personal transfer balance cap because they have another non-death benefit income stream). Deceased parent had an excess transfer balance

The child recipient’s cap increment is reduced if the deceased parent had a transfer balance account that exceeded their personal cap just before they died. In this situation, the child recipient’s cap increment is reduced by their share of the parent’s excess amount.

If you have any questions, feel free to ask them in the comment section. We will be happy to answer all your queries.