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					Will my beneficiaries have to pay tax on my superannuation lump sum death benefit?
Estate Planning Client Guide

Your superannuation benefits are likely to become one of your most valuable assets. Having an estate plan in place can reduce the likelihood that, after your death, the recipients of your superannuation benefits will have to pay tax on those benefits. This could make a substantial difference to the amount they receive.
What is a superannuation lump sum death benefit?
A lump sum death benefit may take the form of either: • a lump sum payment from your superannuation fund when you die or • a payment from your employer (in which case it is known as a ‘Death Benefit Termination Payment’). A superannuation lump sum death benefit is taxed differently from the withdrawals you make from superannuation while you are alive. In certain circumstances, it may be tax-free. • any person who is financially dependent on you at the time of your death (other than your children over the age of 25) • any person with whom you have an interdependency relationship. If your benefits are to be paid to a recipient who is not a Death Benefits Dependant, they must be paid as a lump sum. Children over the age of 18 who are not financially dependent on you are not Death Benefits Dependants. Death benefit pensions paid to children must be commuted once the child attains 25 years of age (unless the child is permanently disabled).

How can my superannuation benefits be distributed on my death?
If you have benefits in the superannuation system when you die, there are rules that restrict who those benefits may be paid to after your death. Your superannuation fund trustee must observe these rules before taking into account any instructions you have provided. One option is for the benefits to be paid as a lump sum. You can either arrange for your superannuation fund trustee to pay the lump sum directly to a recipient, or for the amount to become part of your deceased estate, to be distributed to beneficiaries in accordance with your Will. The alternative is for the benefits to be paid out of the superannuation system to your recipients in the form of a pension. It is only possible to pay the benefit as a pension to a ‘Death Benefits Dependant’ defined as follows: A Death Benefits Dependant includes: • your spouse • any of your children under 18 years of age

What determines how my lump sum death benefit is taxed?
A lump sum death benefit may be tax-free, taxed in the recipient’s hands, or your estate may be taxed on it. The tax treatment of the death benefit depends on: • whether the benefit is paid directly to the recipient or becomes part of your deceased estate and is then paid to the beneficiary named in your Will • whether the recipient is your Death Benefits Dependant. The Better Super reforms (applicable from 1 July 2007) removed the ‘excess benefits tax’, so that the size of your death benefit is no longer a factor in how it is taxed.

Will my beneficiaries have to pay tax on my superannuation lump sum death benefit?
When will my lump sum death benefit be tax-free?
Your lump sum death benefit will be tax-free if the benefit is received by a Death Benefits Dependant. The tax-free status applies regardless of whether the benefit is paid directly to the recipient or paid into your deceased estate and then distributed to the beneficiary of your Will. However, if the benefit is to be paid into your estate, it must be clear from your Will that the death benefit is to be allocated only to Death Benefits Dependants in order for the benefit to be received tax-free. Otherwise, the Australian Taxation Office is likely to allocate the death benefit pro-rata across beneficiaries of your estate in accordance with their entitlements to the estate residue. For example, if your Will establishes a testamentary trust, the death benefit should either be specifically excluded from the trust or only Death Benefits Dependants should be potential beneficiaries. The taxable component is generally only in this form if the death benefit includes life insurance proceeds or is being paid from a Public Service Superannuation Scheme. If the lump sum death benefit is paid into your estate for distribution, rather than directly to the beneficiary who is not a Death Benefits Dependant, the tax treatment is the same except that: • the trustee of the estate is liable for tax on the death benefit, rather than the beneficiaries, who eventually receive the after-tax proceeds and • the deceased estate is not required to pay the Medicare levy.

How did the 2006 Federal Budget affect taxation of death benefits?
The Better Super reforms (applicable since 1 July 2007) introduced several changes to the taxation treatment of death benefits. These changes, which impact both lump sum death benefits and death benefits paid as pensions, include:

What if the recipient of my lump sum death benefit is not a Death Benefits Dependant?
A recipient who is not a Death Benefits Dependant will be taxed on a lump sum death benefit as follows: • the ‘exempt component’ will be tax-free • tax on the ‘taxable component’ will be capped at either 16.5% including Medicare levy (for the ‘element taxed in the fund’) or 31.5% including Medicare levy (for the ‘element untaxed in the fund’). No portion of the taxable component of the death benefit will be tax-free. There is a concessionally taxed portion (known as the ‘low rate cap’) associated with lump sum withdrawals from superannuation, but this is not available on a death benefit. The higher tax rate of 31.5% applies when the taxable component represents an ‘element untaxed in the fund’.

Removal of Reasonable Benefit Limits (RBLs)
Before 1 July 2007, an RBL represented the total amount of concessionally taxed benefits that an individual could receive from the superannuation system. RBLs are no longer a factor in determining the tax treatment of a death benefit.

Restrictions on payment of death benefit pensions
It is now only possible to pay a pension from the superannuation benefits of a deceased member if the pension recipient is a Death Benefits Dependant. Where a pension is already being paid to the member before their death, the reversion of that pension is now only permitted if the reversionary beneficiary is a Death Benefits Dependant, regardless of when the pension was first commenced. Death benefit pensions paid to children must be commuted once the child attains 25 years of age (unless the child is permanently disabled).

Would you like further information?
For further information please contact your AET Estate Planner on 1800 882 218.

Australian Executor Trustees Limited ABN 84 007 869 794 AFSL No 240023 RSE Licence No L0002554 www.aetlimited.com.au
Australian Executor Trustees Limited (AET) AFSL No 240023 provides a range of professional estate planning, superannuation, trustee and investment services to clients across Australia. AET assists clients in drafting their Will, preparing an effective Power of Attorney and providing all the specialist professional services required in estate administration. This document provides general advice only and its recipient should seek professional advice before relying on its contents. AET believes the information to be reliable as at date of issue but excludes all liability for any liability to the extent the law allows.
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