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Super Death – Almost all you need to know

Super Death Benefit Tax
As many know Australian Super is the greatest legal tax haven in the world. Even with the
new $1.6m pension cap, it is still hard to beat Australian super as a retirement savings
strategy. This has led to a complacency of the super death benefit tax.
A super death benefit is made up of the deceased member’s super balance plus any life
insurance. Whether direct or indirect via an estate, a ‘tax dependant’ of a deceased receives
it tax free. A ‘tax dependant’ is; a spouse, an under 18 child and someone who was
financially dependent on or who was in an interdependent relationship with the deceased.
Critically, someone who is not in this list is an adult non-dependent child or other relative. All
non-tax dependants are taxable!
To work out the potential tax you need to know the non-taxable component (tax free), the
taxable component (15% tax) and whether any part of that comes from an untaxed source
(30% tax). If this sounds like tax mumbo jumbo, it is but you can usually find the information
in the member statement. What does yours say?
And there is another insidious tax lying in wait inside the super fund. If to payout the super,
its share portfolio needs to be sold and the super fund at that time was in accumulation
phase, another 10% of tax is payable on any gain on the portfolio (15% if a sale is within 12
A $1m super share portfolio that cost $500,000 that is cashed out to pay the death benefit
and is wholly from an untaxed component will create tax of up to $200,000! If the same $1m
was paid out of a pension fund days before death, there is likely to be no tax to be paid.
There are many other death taxes; unmanaged Division 7A amounts, trading stock issues
for deceased sole traders or partners and recouped depreciation are all tax issues that a
death can trigger.
So don’t let the 1980’s abolition of ‘death duties’ lull you into a false sense of security, death
duties still exists, albeit masked under other forms of tax! Modern estate planning is not
merely structuring to reduce these taxes but also managing the tax information. Beneficiaries
and principals must become informed to these hidden taxes to ensure that they and their
loved ones are not stung.