Superannuation Member and Death Benefits

Superannuation serves as a critical savings vehicle for Australians, designed to provide financial security in retirement. However, the nuances between member benefits and death benefits can be complex. Let’s clarify these differences and explore their implications.

Member Benefits

Member benefits refer to payments you receive from your super fund while you are alive. Typically, these benefits become accessible upon meeting a condition of release, such as reaching preservation age and retiring. Member benefits represent the culmination of your contributions and investment growth within the superannuation system.

Death Benefits

In contrast, death benefits are payments made from your super fund after your death. These benefits are intended to provide financial support to your dependants or your estate, ensuring your loved ones are looked after.

Binding Death Benefit Nominations

A binding death benefit nomination allows you to instruct your super fund trustee on how to distribute your death benefit. By completing a binding nomination, you ensure that your superannuation is paid to your chosen beneficiaries in accordance with your wishes. These nominations typically lapse after three years unless specified otherwise. If a deceased person did not make a nomination, the trustee of the fund may decide who to pay the death benefit to.

Taxation

The Australian Taxation Office (ATO) distinguishes between member and death benefits when it comes to taxation. Member benefits are generally taxed based on your age and the taxed or untaxed components of the benefit. If the member is over 60 and retired, member benefits are typically tax-free.

Death benefits, however, are subject to different rules, often being tax-free when paid to a dependant but potentially taxable when paid to a non-dependant. The taxable component (taxed element) faces a 17% tax, while the taxable component (untaxed element) is taxed at 32%.

For tax purposes, a “dependant” includes a spouse, child under 18, someone in an interdependency relationship with the deceased, or any person financially dependent on the deceased.

The Overlap: A Matter of Timing

It’s worth noting that scenarios can arise where the distinction between member and death benefits becomes blurred. For instance, if a member requests a payment shortly before death, but the payment is processed after their passing, it may be classified as a member benefit, depending on the circumstances and factors such as trustee’s knowledge of member’s death, timing and circumstances of payment, consistency with member’s request.

The ATO has issued rulings on this topic, emphasising that the specific facts and the fund’s governing rules are critical in determining the nature of the payment.

Understanding these distinctions is important for effective superannuation and estate planning. Seek professional financial advice to ensure your superannuation strategy aligns with your individual circumstances and goals. Feel free to reach out to us for a chat.