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Fact Sheet - Superannuation

Fact Sheet – Superannuation

Published on May 19, 2021 by Josephine Heesh , Gillian Kirwan and Peter CarrollJosephine Heesh , Gillian Kirwan and Peter Carroll

Why you need to have a closer look at your superannuation member benefits – who will receive this on your death?

First some relevant terms:

  • Member Benefits are the superannuation fund benefits you are entitled to under the SIS Law and the rules of the Super Fund which accumulate from the money compulsorily paid by your employer while you are working and any money that you pay into your Super Fund under the SIS Law as well as investment growth from those funds;
  • SIS Law means the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994;
  • Death Benefits are Member Benefits payable by your superannuation fund arising on your death while a member of the fund; and
  • BDBN is a special form of nomination under which the trustee of your super fund must pay your Death Benefits as you direct.

What happens to your Death Benefits when you die?

This is an important point – your Death Benefits do not automatically form part of your estate upon your death, so your Will does not directly govern where your Death Benefits go. However, the whole or part of your Death Benefits can be paid to your estate after your death in which case, they will be governed by your Will.

There are different types of super funds: many people belong to an industry regulated super fund; a retail super fund; and others establish their own self-managed funds called SMSFs.

All super funds are governed by the SIS Law.  The SIS Law stipulates that your Death Benefits must be paid to one or more people who are eligible, so any non-binding nomination or BDBN you make must only be to a SIS approved “dependant” (SIS Dependant) or to your legal personal representative (LPR).

There is a distinction between SIS Dependants to whom Death Benefits can be paid and “death benefits dependants” for tax purposes.

SIS Dependants include:

  • your spouse (including de facto and same sex partners but not former spouses);
  • your children (any age);
  • a person in an interdependency relationship with you (this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other).

The trustee of your super fund may pay your death benefits to your LPR in one of 3 ways: pursuant to a non-binding nomination made by you; pursuant to a BDBN; or where there is no non-binding nomination nor BDBN.

If you make:

  • a BDBN – the trustee must pay your Death Benefits to the SIS Dependants or to your LPR which you have nominated and in the proportions specified. You should pay attention to whether the BDBN is lapsing or non-lapsing. Lapsing typically expires every 3 years unless you renew them. A non-lapsing BDBN may never expire but it can be replaced by a new one; and
  • a non-binding nomination or make no nomination – the trustee will pay your Death Benefits to your estate or use its discretion to determine which SIS Dependants will receive your Death Benefits. The only difference is that in the case of a non-binding nomination, the trustee will “consider” the member’s expressed but non binding wishes.

The form of the payment, and to whom it is paid, will also depend on the governing rules of your super fund and the SIS Law.

Taxation

Your “death benefits dependants” for tax purposes include:

  • your spouse or de facto;
  • your former spouse or de facto;
  • your child under the age of 18;
  • a person financially dependent on you; or
  • a person in an interdependency relationship with the deceased.

The tax payable on Death Benefits will depend on:

  • whether the recipient was a death benefit dependant for tax purposes;
  • whether it is paid as a lump sum or income stream;
  • what part of the Death Benefits is tax-free or taxable and whether the trustee had already paid tax on the taxable component; and
  • your age and the recipient’s age when you died.

Death Benefits paid to a recipient who is a foreign resident, for Australian tax purposes, will receive the same tax treatment as Death Benefits paid to a resident however, foreign residents are generally exempt from the Medicare levy.

Self-managed superannuation funds (SMSF)

The difference between a SMSF and other types of industry or retail funds is that the members of a SMSF usually control the trustee. This means the members of the SMSF can administer it as they wish provided they comply with the SIS Law and tax laws.

If you have an SMSF, on your death the trustee of the SMSF must pay your Death Benefits in accordance with your BDBN. If the Death Benefits are not paid to your LPR and the recipient is a SIS dependant of you (e.g. your spouse), the Death Benefits can be paid as a lump sum or income stream otherwise Death Benefits must be paid by way of a lump sum.

Helpful links:

If your Death Benefits are to be paid to a death benefits dependant for tax purposes:

https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-and-paying-tax/?page=6#Ifyouareadependantofthedeceased

If your Death Benefits are not to be paid to a death benefits dependant for tax purposes:

https://www.ato.gov.au/Individuals/Super/In-detail/Withdrawing-and-using-your-super/Withdrawing-your-super-and-paying-tax/?page=6#Ifyouarenotadependantofthedeceased

Important note:

If you want your Death Benefits to form part of your estate, you must make a BDBN in accordance with SIS Law and the rules of the super fund nominating your LPR.

You must ensure that your nomination form (whether a BDBN or not) has not been completed nominating someone who is not your LPR, your spouse, your child or to someone who is otherwise not a SIS Dependant.

Conclusion

It is very important that you provide a BDBN to your super fund so that your Death Benefits are paid in accordance with your wishes. Should you wish to discuss how to make a BDBN, please contact Gillian Kirwan at Carroll & O’Dea Lawyers on 02 8226 7321.

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