When you die with superannuation two questions arise:
Firstly, who gets the money? How can you ensure it goes where you want and not where the trustee decides?
Secondly, what tax is payable by the recipient? What steps can you take to reduce the tax burden on the recipient?
This article examines the second question.
Superannuation Testamentary Trust v’s Superannuation Proceeds Trust Super Proceeds Trust
Professor Brett Davies invented Superannuation Testamentary Trusts on 1 May 1994. In contrast, the Superannuation Proceeds Trusts are a poor copy of the Superannuation Testamentary Trust.
Superannuation Death Duties – 17% or 32% tax on your Superannuation at death
When Mum and Dad die, they want to leave money to their children. They spend their superannuation frugally to leave as much as possible in the super fund. They nominate their children to get their super after they both die.
Usually, when you and your spouse die, your children are in their 60’s. At the very least, in Australia, they are likely to be over 18-years-old.
Superannuation death benefits are tax-free when paid to ‘tax dependents’ (Tax Dependent – see the table below).
But a ‘death tax’ applies to ‘non-dependents’ like adult children. The Australian Taxation Office (ATO) reaps millions of dollars a year from this non-dependency superannuation death tax.
Superannuation Death tax in Australia
By 1983 all Australian States abolished death duty and probate duty. Before then you had to pay up to 27.9% tax on a deceased estate over $1m.
While probate duties are dead, six defacto death duties arise from the ashes:
- Stamp (transfer) duty
- income tax
- Capital Gains Tax
- 32% non-dependency tax
- a beneficiary goes bankrupt
- a beneficiary gets divorced
This article considers the 4th defacto death duty. This is the 17% or 32% tax, immediately payable on your death. This is when your superannuation goes to ‘a non-dependants’. This term is defined by tax legislation. The definition of ‘dependency’ under the superannuation legislation is different.
Only ‘non-dependants’ are taxed in your superannuation at death
There are two definitions of ‘dependents’:
- The first is under the Superannuation Industry (Supervision) Act (SISA).
- The second is under the Income Tax Assessment Act (Tax Act). Only dependents under the Tax Act avoid the super death tax.
“Dependents” are only calculated at one point in time. This is at the moment of your death:
|Superannuation Dependant:||Tax Dependent:|
|Your spouse, de facto partner and same-sex couple||Your spouse, former spouse, de facto partner and same-sex couple|
|Children of any age||Only children under 18 years old|
|An ‘interdependency relationship’. A close personal relation, who you live with, where one or both of you provides for the financial and domestic support, and care of the other||An ‘interdependency relationship’ (same definition as superannuation laws)|
|A person who is dependent on you, particularly financially|
2% Medicare on your superannuation at death:
The tax on different components of your Superannuation is 17% or 32%. This includes the 2% Medicare levy. This is if the Superannuation is paid directly to your adult children (rather than into your Will).
However, the Medicare levy is not payable if the death benefit superannuation is paid to the Estate (into your Will). This is the case even if the non-dependency tax is payable. Therefore, the non-dependency tax rates through any Will are usually never higher than 15% or 30%.
Of course, if you have a Superannuation Testamentary Trust in your Will then the 15% and 30% tax rates are usually reduced to zero, anyway.
No superannuation tax on Police officers and soldiers killed in the line of duty
This is an exception to the rule. If you get the superannuation from a dead police officer or soldier then you are always treated as a ‘tax dependant’. You, therefore, never pay the non-dependency tax.
For example, the soldier has not seen his rich parents for 20 years. The soldier dies in the line of duty. If the super goes to his parents they get it tax-free. As to what is ‘line of duty’ see ITAR 302-195 and Regulation 302-195A. Strangely, such a dead person is not an SIS Dependant. They are only a tax-dependent.
How superannuation is taxed at death in Australia
- A lump sum superannuation death benefit paid to someone who is not a death benefit dependent for tax purposes is subject to 17% or 32% tax.
- In contrast, lump-sum death benefits paid to someone who does qualify as a death benefit dependent for tax purposes are entirely tax-free.
For example, a child over 18 suffers the superannuation tax. In contrast, a spouse and child under 18 get the superannuation tax free. However, a Superannuation Testamentary Trust in your Will often reduces this tax to zero.
In Australian Superannuation, there are three taxing points:
- your money may be taxed when it goes in;
- when it comes out; and
- taxed on the Superannuation income.
We now consider how wealth gets into your superannuation fund.
Two ways to get money into Super: Concessional and Non-Concessional contributions
There are only two ways to get money and assets into a superannuation fund. You put in pre-tax dollars (concessional). Or you put in after-tax dollars (non-concessional).
- If you put pre-tax dollars into your Superfund then the government wants to tax it. The tax rate going in is normally 15%. (It can be higher or lower.) This is called a ‘Concessional contribution‘. Examples include employer contributions and personal contributions. When you die your adult children usually pay 17% to 32% tax on these concessional contributions (Super Death Tax)
- Non-Concessional contributions are contributions where income tax is already paid. You make the contribution after you have paid income tax. For example, you earn some money and you have $110,000 left after tax. If you put that $110,000 into your Superfund then it is a non-concessional contribution. The money going in is not taxed again. There is no 15% tax on this money. When you die your adult children usually do not pay the Super Death Tax.
Superannuation Death Tax in Australia
Both ‘Superannuation’ Dependants and ‘Tax’ Dependants can get your Superannuation when you die. But only Tax Dependants get your superannuation tax-free.
You can pay Tax Dependents in two ways: as an ‘income stream’ or as a ‘lump sum’. (But non-dependents only get a lump sum.)
Who decides who gets your superannuation at death?
Our clients are concerned about two things:
- “It is my superannuation so I should have the full and the unfettered right to give my superannuation to whoever I want.”
- “I already paid 15% on my superannuation going in. I am sure I do not want my family to pay another 17% or 32% going out.”
Below addresses our client’s first concern: where does not super go at death?
A Will does not decide who gets your superannuation. Rather there are three ways:
- Superannuation Trust Deed. The Trust Deed itself may set out the mandatory rule. It may say that irrespective of anything when you die your superannuation must always go to your ‘legal personal representative’ (LPR). If you have a Will your LPR is your executor. There is no discretion. Not happy with that? “Well leave and go to another superannuation fund. That is the way we do it around here. So like it or leave.” (See for example GESB’s Gold State.)
- Trustee of the superannuation fund decides. This is the most common way. When you die the person running the superannuation fund (or rather one of his staff) decides who gets your superannuation.
- Big superannuation funds are getting sick and tired of having to make these decisions. And these decisions can be reviewed. (See Stock v NM Superannuation Proprietary Limited).
- If you have an SMSF with only humans as the trustee (rather than a company) then the child who is the remaining trustee of the SMSF may decide to give all your super to themselves. And nothing to their siblings.
- Binding Death Benefit Nomination (BDBN). Your self-managed super fund deed or the retail or industry superannuation fund deed may give you the right to decide who gets your superannuation at death. This is becoming more common. This right or procedure is called a ‘Binding Nominaton’. The nomination can expire after 3 years or it can be non-lapsing. Which means it lasts until the day you die.
Since 2007, superannuation death benefits paid to non-tax Dependants as a lump sum are taxed:
- The tax-free component of the death benefit is tax-free
- the taxable component is taxed at:
- for the taxed element – a maximum of 15% (plus Medicare); and
- for the untaxed element – a maximum of 30% (plus Medicare)
|Age at Death||Death Benefit||Recipient Age||Tax on Taxed Element||Tax on Untaxed Element|
|Any Age||Lump-Sum||Any Age||0%||0%|
|Age 60 and Above||Income Stream||Any Age||0%||MTR less 10% tax offset|
|Below Age 60||Income Stream||Age 60 and Above||0%||MTR less 10% tax offset|
|Below Age 60||Income Stream||Below Age 60||Marginal Tax Rate (MTR) less 15% tax offset||MTR|
Your Non-Tax Dependents pay:
|Age at Death||Death Benefit||Recipient Age||Tax on Taxed Element||Tax on untaxed Element|
|Any Age||Lump-Sum||Any Age||15% plus 2% Medicare levy||30% plus 2% Medicare levy|
No super death tax for ‘Financial dependent’ and ‘interdependency’
When you die your child of any age may receive a lump sum payment directly from your superannuation fund. But, your adult child only receives the taxable component tax-free if they are either:
- your ‘financial dependant’, or
- in an interdependent relationship with you.
Both tests are calculated at the moment of your death. It is a snapshot test.
Obviously, your adult children continue to receive the ‘tax-free component’ of your death benefit tax-free.
If you are a spouse, former spouse or minor child (under 18 years of age) of the dead person then you get the superannuation tax-free. For everyone else you need to prove either ‘interdependency’ or ‘financial dependency’:
1. “Interdependency” at the moment of your death
You and another person (you don’t have to be related) have an interdependency relationship if:
- you have a close personal relationship; and
- you live together; and
- one or each of you provides the other with financial support; and
- one or each of you provides the other with domestic support and personal care normally.
All the above requirements must be satisfied (except for disabilities). See section 302-200(1) Income Tax Assessment Act 1997.
What about an adult child who moves back in with you – or never left? Simple convenience is not enough. However, caring for an elderly or sick parent ticks the box.
Disabilities: What if you or the dead person, or both of you suffered physical, intellectual or psychiatric disabilities? This does not stop you from having an interdependent relationship. For example, an adult disabled son’s super goes to his mum and dad, via his estate. While his parents are not ‘financial dependants’ they may be ‘interdependent’.
If you or the dead person suffers from a disability then you only need to satisfy a ‘close personal relationship’. This is without meeting the other requirements if the reason they are not satisfied is that either of you suffers from a disability.
Temporarily apart: An interdependency relationship criteria is also met if you have a close personal relationship but are temporarily living apart. See section 97 302-200 ITAA and ITAR 97 section 202-200.02.
For interdependency, there is no requirement that the dead person provided any financial support.
Is my girlfriend a ‘tax dependent’ for my superannuation at death?
For a ‘spouse’ you do not need ‘financial dependency’ or ‘interdependency’. A ‘spouse’ automatically ensures that the Superannuation Testamentary Trust in your Will reduces the superannuation death tax to zero.
But is a ‘girlfriend’ who does not live with you a ‘spouse’ for superannuation tax-dependency?
Consider the NSW case of Trustee and Guardian v McGrath and others  NSW SC 1894. To “live together” as a couple, you do not necessarily have to share the same residence.
This is a case about a de facto relationship. It was not about the 32% tax on your super at death.
Facts of Trustee and Guardian v McGrath
- The couple, with their respective life spouses, had been friends for 20 years.
- Each of their respective spouses dies within weeks of each other.
- The couple’s bond gets closer over the next 13 years.
- They never lived together.
- But they are boyfriend and girlfriend. They are intimate.
- They speak every night on the telephone.
- They meet at least a couple of times a week.
- They often holiday together.
- They attended family functions together. Albeit only on side of the family. The other family could not stand the relationship.
Decision of Trustee and Guardian v McGrath
One of them dies. The dispute is whether they are in a de facto relationship.
Is your ‘friend’ actually your spouse?
The court states the matter is borderline. But there is sufficient evidence to support a de facto relationship. The Court considers how devoted the couple is to each other. This is the case even though they never share a permanent residence together.
What do we learn from the case of Trustee and Guardian v McGrath?
This case did not concern the ATO. But you can see how the ATO has a hard time trying to disprove relationships. It would be a brave ATO to cross-examine a person on ‘intimacy’.
Also, the case suggests that there is no one determinative factor. This is when considering whether two people are de facto. The decision depends on the court’s view of the overall circumstances of the case.
2. “Financial Dependent” at the moment of your death
To prove this the adult child needs to be relying on the dead person’s money.
To make the point clear:
- This is not about you giving financial support to the dead person.
- This test is only about the dead person giving you financial support.
You would have thought this is easy to prove as parents tend to dote on children until the day they die. However, to try and close this loophole the ATO takes a narrow view:
- is the person ‘wholly or substantially’ maintained financially by you?
- if your financial support is withdrawn, does the person survive?
- does your financial support merely supplement the person’s income?
- is the financial support merely for a higher ‘quality of life’?
- could they meet their daily needs and basic necessities without your additional financial support?
- is there reliance on regular and continuing financial support for day-to-day living requirements?
- what receipts for expenditure and evidence are there for living expenses?
The ATO has a hard time disputing what you tell them. Unlike George Orwell’s book Nineteen Eighty-Four the ATO does not have cameras set up in your home (well not yet). So the ATO has no idea what happens in the privacy of your home.
Also the above is the ATO’s view on what is ‘financial’. The Court’s view is different. The Court’s view prevails over public servants such as the ATO.
You calculate the superannuation death tax using the proportioning rule.
How the Proportioning Rule works in your superannuation at death
Step 1: Work out the tax-free and taxable components of the super interest just before the lump sum is paid.
Mary started working on 10 August 1982. She would have turned 65 on 1 July 2025. Sadly, Mary dies on 1 July 2021. Her superannuation fund comprises $400k, 25% that is tax-free and 75% that is taxable.
The lump-sum is $280,000. The tax-free component is $70,000 (25%). The taxable component is $210,000 (75%). Mary leaves her money to her darling daughter Lucy.
Step 2: Calculate the taxed element. This is: ( Lump sum x Service days ) / ( Service days + Days to retirement )
The number of service days, between the date Mary started working and the retirement date, are 13,841. She had 1,095 days to retirement when she died.
Applying the rule: ( $280,000 x 13,481 ) / ( 13,481 + 1,095 ) = $259,472.
Less the tax-free component: $259,472 – $70,000 = $189,472.
The total taxed element is $189,472.
Step 3: Calculate the untaxed element.
The taxable amount less the taxed element is:
$210,000 – 189,472 = $20,528.
Therefore, the untaxed element is $20,528. Lucy pays this as tax to the ATO.
How to avoid death taxes on your superannuation on your death
Here are some ways to keep your money out of the super death tax trap:
- Do not die (we understand that medical science is working on this).
- Ensure you create a beneficiary that qualifies as a dependent for income tax purposes (Tax Dependent). This is at the time of your death. Your accountant and financial planner can help you with this. We do not give advice in this area. Put in a Superannuation Testamentary Trust in your Will. (All Legal Consolidated 3-Generation Testamentary Trust Wills contain Super Testamentary Trusts.)
- Ensure 100% of your benefits form part of the tax-free component.
- Have nothing inside your superannuation fund at the time of death. Distribute all your superannuation before you die. But superannuation is a wonderful tax-free environment. So your financial planner would be sad to see you lose the tax-free status.
The simplest solution is to leave your super to your Estate and put a Superannuation Testamentary Trust in your Will.
Whether a person is a ‘dependent’ for tax purposes is a question of fact. We judge every case on the facts. However, from our experience, we know that you can pass on your money tax-free by:
- Speaking to your accountant and financial planner. Make sure your super gets into your Will. (E.g. binding death nomination directing the super at death to go to your ‘legal personal representative’.)
- Put a Superannuation Testamentary Trust into your Will. See a sample of this. This protects your super from the Super Death Tax.
- Have your Tax Dependents in your Superannuation Testamentary Trust receive the capital amount. If you are worth under $10M, then paying your grandchild’s private school fees of $20,000 every second year would generally make that grandchild your dependent. The trust capital does not need to be paid out for 80 years from the date of your death. In the meantime, your children direct the income from the superannuation to themselves. If there is any money left after 80 years, it goes to your grandchild (or their family if dead).
- In summary, the Tax Dependent is decided at the moment of your death. Let’s say it is one of your grandchildren. In 80 years that grandchild gets the capital. In the meantime, the income is not subject to the Superannuation Death Tax. The income is distributed as per your children’s direction as controllers of the Superannuation Testamentary Trust. Only the capital left in 80 years from the date of your death goes to that grandchild.
Dad does not want to have his adult children pay 32% tax on his super at his death:
Dad is a widower. He has $2M in his Super Fund. All his super is contributed concessionally. That is, he put in his Fund pre-tax dollars.
Dad’s three children are all over 18 years of age. They no longer live in the family home. They are not dependent on him, although they do come over for dinner regularly. His oldest son has a daughter, Estelle. She is an angel. She is Dad’s only grandchild.
Dad wants to leave an inheritance to his children. But his financial planner tells him that, at death, his children will pay over $323,000 in non-dependency tax on his Super.
Dad does not want to pay tax on his super at death:
- prepares a Will containing a Superannuation Testamentary Trust
- signs a non-lapsing death benefit nomination to the estate (so his super goes into his Will), and
- writes a cheque for granddaughter, Estelle’s private school fees each year
With all his affairs in order, Dad dies peacefully.
His superannuation is directed to his Will (‘legal personal representative). There is a Superannuation Testamentary Trust in his Will. A ‘dependent’ for tax purposes is calculated at one time. This is at the exact moment of Dad’s death. Dad had one dependent for tax purposes, Estelle.
The whole of the $2M of super goes to Estelle, but it is only payable in 80 years’ time. In the meantime, Dad’s children use a third of the superannuation’s income each.
If there is any money left in 80 years then that remaining capital goes to Estelle.
Under 18 years of age when a parent dies. But over 18 when you get their super
Although the law states explicitly that the time for testing interdependency and financial dependence is just before
the death of the dead person, the position for spouses and children relies on the ATO’s practice.
The ATO states that it applies a similar timing rule for these categories of dependants.
This means, for example, that a child who is under 18 when the deceased died is regarded as a dependant. This is the case even if the child is 18 or older when the death benefit is paid to the Legal Personal Representative (LPR). See TD 2013/12.
Similarly, the ATO accepts that the payment of a death benefit to the estate of a spouse who is alive when the first deceased died is a payment to a dependent spouse. This is the position in TD 94/69 (now withdrawn) for a
predecessor provision and is adopted in Published Private Ruling (PBR) 1051838730781.
What about the income that is generated on your superannuation after you die?
The above issues are about not losing nearly 1/3rd of your super immediately at the moment of your death. The second issue is the income tax payable each year on the assets that go into your Will. This includes your superannuation proceeds.
Example of how a Superannuation Testamentary Trust reduces income tax each year for 80 years after you die
You die. You have $1m in super. It goes to a tax dependant. Let us say that if your wife. Your wife gets the whole $1m. This is tax-free. This is because a spouse is automatically a ‘tax’ dependent.
But your wife puts the money in the bank at, say, 5%. That $50,000 in interest she has to pay tax on. This is every year. But if the $1m is in the Superannuation Testamentary Trust then the $50,000 interest is often tax-free. This is every year.
Minors do not pay the 66% tax with Superannuation Testamentary Trusts
When you distribute trust income to a minor their tax rate is a penalty 66%: Division 6AA Income Tax Assessment Act 1936. But thanks to Section 102AG for any beneficiary under 18 years of age (including children and grandchildren) the tax rate is the same tax rate as an adult. This is if you have a:
- 3-Generation Testamentary Trust Will
- Superannuation Testamentary Trust in your Will
This is another advantage of having super go into your 3G Testamentary Trust Will.
But Section 102AG(2AA) was amended in 2020. This was because:
… some taxpayers are able to inappropriately obtain the benefit of this lower tax rate by injecting assets unrelated to the deceased estate into the testamentary trust. This measure will clarify that minors will be taxed at adult marginal tax rates only in respect of income a testamentary trust generates from assets of the deceased estate (or the proceeds of the disposal or investment of these assets).
The Division 6AA Explanatory Memorandum (‘EM’) further states:
1.13 … These requirements are directed at ensuring that assets unrelated to the deceased estate cannot be injected into the testamentary trust and derive income that is excepted trust income for the purposes of Division 6AA. That is, the requirements ensure that there is a connection between the property from which excepted trust income is derived and the deceased estate that gave rise to the testamentary trust.
Example 1.1 Injected asset
On 1 July 2019, testamentary trust ABC is established under a will of which a minor is a beneficiary. Pursuant to the will, $100,000 is transferred to the trustee from the estate of the deceased. Shortly after the testamentary trust is established, a related family trust makes a capital distribution of $1,000,000 to the testamentary trust. The resulting $1,100,000 is invested in ASX-listed shares on the same day. A dividend income of $110,000 is derived for the 2019-20 income year. The net income of the trust is $110,000 and the minor is presently entitled to 50 per cent of the amount of net income.
The minor’s share of the net income of the trust is $55,000. $50,000 is attributable to assets unrelated to the deceased estate and not excepted trust income. $5,000 is excepted trust income on the basis that it is assessable income of the trust estate that resulted from a testamentary trust, derived from property transferred from the deceased estate.
Therefore assets unrelated to the deceased estate cannot be injected into the testamentary trust. We are of the view that has always been the law. Our Wills comply with these rules.
Questions about Superannuation Testamentary Trusts at death
These answers relate only to Superannuation Testamentary Trusts contained in a 3-Generation Testamentary Trust Will.
Q: What is the tax rate on the income earned on the Superannuation benefit over that 80 year period?
- The income earned on the capital is, of course, subject to normal income tax. The marginal tax rate payable is as per the person receiving the income.
- There are additional benefits as the superannuation is part of the deceased estate. Normally, a person under 18 years of age pays tax at 66% under Division 6AA ITAA 1936. This is a penalty tax rate for minors getting unearned income.
- However, because the Superannuation is now part of a testamentary disposition the penalty child tax rate does not apply. See section 102AG ITAA 1936. Instead, minors pay taxes as if they were adults. This is good news. E.g. if you have 10 great-grandchildren under 18 years of age then you can absorb over $200,000 of income, each year, without paying any income tax.
Q: Any tax obligations on the Tax Dependent – either now or in 80 years?
The Tax Dependent has no taxation obligations – either now or in the future. To labour the point, in 80 years time, if there is any capital left it goes to the Tax Dependent or, more likely, their next of kin for no tax.
Q: How do you prove that a person is a Tax Dependent?
It is always a question of fact as to whether you die leaving behind a ‘spouse’, ‘de facto’, ‘interdependency’ or ‘financial dependent’. This is decided at one point in time – the moment of your death. There is no rule. The Courts look to each set of facts with fresh eyes. As to ‘financial dependency’ a rough rule of thumb is that if you are worth under $10m then paying a grandchild’s private school fees of $20k every 2nd school would probably make that grandchild a Tax Dependent. (You only need one Tax Dependent to reduce the Super Death Tax to zero – provided you have a Superannuation Testamentary Trust in your Will). Where your accountant, lawyer or financial planner wishes more certainty then we can provide a comprehensive letter of advice setting out the facts, law and conclusions:
- before you die, we sign off to say that, based on the facts, you have done what is necessary to create a Tax Dependent; or
- after you die, establish and collect the necessary evidence and sign off on the existence of the Tax Dependent.
Q: How long does the Superannuation Testamentary Trust go on?
There are many types of trusts in Australia. They only exist for 80 years. They include:
- 3-Generation Testamentary Trust in a Will – the 80-year period only starts when you die
- Superannuation Testamentary Trust in a Will – the 80-year life of the trust only starts when you die
- Family Trust – 80 year period starts the day you set up the Family Trust Deed
- Unit Trust – 80 year period starts the day you sign your Unit Trust deed
Australian trusts only last 80 years. (SA doesn’t have the 80-year rule, but any beneficiary can direct the trust be vested in that State). After 80 years they must vest. More information here.
Self-Managed Super Funds go beyond 80 years. In fact, an SMSF continues on while it has living members.
Q: What if the Tax Dependent dies before the trust vests? Dealing with trust capital.
The capital of the trust is unlikely to last 80 years. There is no requirement to invest capital in appreciating assets. For example, you may purchase depreciating assets like boats and cars. But whatever is left after 80 years vests in the Tax Dependent. Usually, the Tax Dependent would have died from old age. Therefore, the capital goes according to the Tax Dependent’s Will or next of kin.
Q: How do I prove ‘financial dependency’?
There is no hard rule as to what is required to satisfy ‘financial dependency’. It is a question of fact to be decided in each case. For example, if the person you are supporting is poor, then not much financial support is needed. If the person is rich then you need to give them a lot more money to prove that they are financially dependent on you. Another factor is that financial support is a necessity in life.
These tests appear to imply that only the necessities of life are relevant. For example, in Private Binding Ruling 64085 the dead granddad paid for social outings, medication, pocket money, chocolate, music, CDs and costs for football for a grandchild. It was not enough to establish financial dependency. (Many would argue that football and chocolate are necessities of life!)
Similarly, in PBR 40376 the money spent “tended to be on luxury items such as entertainment, rather than the child’s day-to-day living expenses”. In this example, financial dependence was not made out.
That is why supporting grandchildren and their private school fees work well. In Private Binding Ruling 52530, the payment of school fees, along with payment for necessary food, shelter and clothing, was enough to prove that the child was dependent on the dead person. Generally, if the grandchild and his parents are worth under $5m then the payment of school fees to one of the grandchildren every second year would be enough to prove financial dependency.
Hint: Regularity and continuity are important for financial dependency. The ATO requires that you show reliance on regular and continuous contributions. The dependant shows that they received financial or substantial help from the dead person. This is to meet their “basic” needs. (Whatever that means from one generation to another.) This is over a regular and continuous period. The trustee of the superannuation fund needs evidence to make a decision. Financial dependency is harder to prove if you are rich. A rich person doesn’t need money for the ‘necessities of life’.
Remember, the ATO is keen to get back death duties in Australia. It goes out of its way to argue that there is no financial dependency. Haven’t said that in the 100s of disputes we have had with the ATO on this matter we have never lost a financial dependency or interdependency argument. The ATO knows it is not a solid ground in their arguments, but so few people are willing to take the ATO on.
Does the Superannuation Trustee hold and pay the 17% or 32% tax to the ATO?
If the Superannuation fund is paying the super directly to a person then the super fund decides if the person is a ‘tax’ dependant. However, if the super fund is paying it to the estate then it doesn’t have to address its mind to this question.
Otherwise, if the super gets into the Will then the Executors must give thought to this.
What if the Superannuation Trustee or the Executor in the Will decides that the person is a ‘non-tax dependant’? It holds back the 17% or 32% tax (or 15% or 30% for the estate) and sends it to the ATO.
When it doubt any of the parties can approach Legal Consolidated for advice on the matter.
What to do about the tax on super when you die?
Work with your accountant and financial planner. Reduce the Super Death Tax to zero. Consider superannuation as part of your broader estate planning. If you don’t, the ATO is the grim reaper at your death.
Example of borrowing from a Superannuation Testamentary Trust
Question: The grandfather has $1m in taxable component of super and life insurance. This is within superannuation.
His son is 40, a brain surgeon, very successful and wealthy. The son is not a “tax dependent” of his dad. But the son has a 6-year-old child.
The grandfather pays to maintain this grandchild. This is by paying some of the grandchild’s school fees, food and other necessities. The grandson, therefore, becomes “tax dependent” on his grandfather.
Our financial planning practice builds a:
- 3-Generation Testamentary Trust on your law firm website. It, therefore, contains a Superannuation Testamentary Trust.
- binding nomination to make sure the superannuation goes into the grandfather’s Will on his death.
The grandfather dies.
The grandfather’s super money flows from his superannuation fund, into his estate (Will). This is into the protection of the Will’s Superannuation Testamentary trust. The “Tax dependant” is calculated at the moment of death. The grandson is a “tax dependant”. This is because the grandson is financially dependent upon his dead granddad. All superannuation (including the 15% and 30% taxes) is therefore reduced to zero.
The superannuation proceeds are for the benefit of the 6-year-old grandchild. In 80 years from the date of the Granddad’s death, any capital left in the Superannuation Testamentary Trust must be paid to the Grandson.
In the meantime, the dead grandfather’s children are borrowing at zero interest the capital in the Superannuation Testamentary Trust. For example:
- one of the dead grandfather’s children now wishes to access cash from the Superannuation Testamentary Trust to repay his mortgage and upgrade his house. He borrows $600,000 from the Superannuation Testamentary Trust at no interest. And uses the capital to repay his home loan.
- Another of the dead grandfather’s children buys a boat, caravan, jet ski, in the name of the Superannuation Testamentary Trust. That is fine. The Superannuation Testamentary Trust is not a capital-protected trust.
The dead grandfather’s children do not wish to ever make any repayments on this loan from the Superannuation Testamentary Trust.
What is the comeback if the test individual wants to try and protect the capital in the Superannuation Testamentary Trust?
Answer: That is a very long question. I will break it down:
1. Is the grandson a ‘tax dependant’
The answer to this question depends on the facts of each case. If the father is wealthy then paying school fees etc.. may not be enough.
The richer the father and the grandson, the more the grandfather needs to pay for the maintenance of the grandson.
2. Read the terms of the Superannuation Testamentary Trust?
The Superannuation Testamentary Trust is a trust. The terms of the trust are set out in the Will. Much like a Family Trust you read the terms of the trust. It sets out the rules. Similarly, the rules of the Superannuation Testamentary Trust are set out in the Will.
You state “The superannuation proceeds are for the benefit of the 6-year-old grandchild.”. That is not a true statement. The grandchild is only down to receive the capital (not the income). Only the capital that is left after 80 years is earmarked for that particular grandchild.
The Superannuation Testamentary Trust sets out that the Grandfather’s children have the right to all income of the wealth sitting in the Superannuation Trust. So the dead grandfather’s children are acting in accordance with the terms of the trust. This is when they take the income. And this is when they use the capital as they see fit.
As a way of further clarification consider a Family Trust. The Specified Beneficiaries in the Family Trust are often the ‘children of the union of mum and dad’. In 80 years’ time, any capital that is left in the Family Trust must be paid out to the Specified Beneficiaries. But that does not stop mum and dad from doing with the money in the Family Trust as it wishes.
3. Paying back the loans
You make a big issue about the loans not being paid back. While the value of the capital in the Superannuation Testamentary Trust is not protected, you need to account for the money being used out of the Superannuation Testamentary Trust.
Where there has been no activity or repayment within 6 years then the loan fails. That is not right. When you borrow money you need a legally binding loan agreement. And within 6 years you need to have paid $1 or some other amount. Or built and signed a Deed of Recognition of a Loan.
4. Can the ‘tax dependant’ challenge the Will?
Now, this is questions you do not ask. And rightfully so. If a person has a right to challenge a Will then testamentary trusts, 3-Generation Testamentary Trusts, Superannuation Testamentary etc… do not get in the way of that. In other words, if you can challenge a Will then it makes no difference what trusts you put in the Will.
Whether a person is a ‘tax-dependant’ is not relevant as to whether that person can challenge a dead person’s Will. They have the right to challenge the Will because of their relationship with the dead person. For example, parent, spouse, child or grandchild of the dead person. It is not relevant whether the person wanting to challenge the Will is a ‘tax dependant’ under the Income Tax Assessment Act.
This article explains who can challenge a Will and how to stop them.
Can my sister and her adult children be ‘tax-dependants’?
Q: My only family is my sister and her adult children. Do I have to wait for my sister’s children to have minors so that I can give them money? And make them tax dependent on me?
A: An accountant in Sydney successfully argued that a cleaning lady was a ‘tax dependant’ for the dead person. Your sister and your adult nephew themselves could potentially be ‘tax dependants’. I am not sure why you asked this question. Are you suggesting that people under 18 are easier to make a ‘tax dependent’? There could be an argument for that. But looking through the cases, again, I don’t think the age of a person makes much difference (unless, of course, your children are themselves under18 at the date of your death. Which is, thankfully, a rare event.)
If I have no ‘tax-dependants’ am I still better off leaving my superannuation into a Superannuation Testamentary Trust?
Q: If I am childless am I still better off leaving my superannuation into my Will’s Superannuation Testamentary Trust?
After all, in or out of my Will without a tax dependant, they always pay the 15% (plus Medicare) or 30% (plus Medicare).
This is because of the greater flexibility in the 3-Generation Testamentary Trusts in my Will. (Of course, if I get terminal cancer or are in my late 70s I can always pull out the super and therefore avoid the non-dependency tax.)
A: I am not sure of the relevance of being ‘childless’. You do not need to have children to find a ‘tax-dependant’ for the dead person.
Anyone potentially can be a ‘tax-dependant’. Speak to your accountant about that. You don’t need to have a spouse and children under 18. There are two other categories in which a person can be a ‘tax-dependant’. And these two other categories do not require that they be related to you.
You make the point that if you know the date of your death or you are old (and late 70 is not old, young man!) you can quickly draw your money out of superannuation. That is one of the many clever strategies that your accountant and financial planner can recommend. I hasten to point out that the Superannuation Testamentary Trust itself is just one of the many strategies to reduce tax on your superannuation. Talk to your accountant and financial planner about the many other strategies such as Reversionary Pensions.
As well as escaping the 32% non-dependency tax – ADDITIONAL BENEFITS of leaving your superannuation into a Testamentary Trust
In the unlikely event that out of the 8 billion people on this planet Earth not one of them can be found to be a ‘tax dependant’ then I agree with you. But it is still better to put the super into the Superannuation Testamentary Trust Will. This is for these reasons:
1. Removes the Medicare Levy
In a Legal Consolidated 3-Generation Testamentary Trust Will, you get rid of the Medicare levy tax on the super. This automatically saves your beneficiaries a couple of per cent in itself.
2. Superannuation Proceeds Trust reduces the four defacto death duties
The money in the 3-Generation Testamentary Trust can be manipulated. It generally gets rid of a lot of ongoing income tax on any income that the post-superannuation earns after you die. And it often washes out CGT on assets your beneficiaries buy with that money. In general, it gets rid of these ongoing death duties.
3. Asset protection
Asset protection from creditors. This is via the Legal Consolidated Will Bankruptcy Trusts.
4. Divorce Protection
If a beneficiary separates or divorces the Divorce Protection Trust kicks in to protect the assets.
5. Pay income each year to adults currently on low rates of tax
Like a Family Trust, distribute income to a wide range of adult beneficiaries (determined by the Appointor) who are, for that financial year, on a low marginal tax rate. And next financial year select different people, if you wish.
6. Children and minors taxed on the lower adult tax rates
Unlike a Family Trust, children and minors getting ‘unearned’ income pay a penalty tax rate of up to 66%.
However, under both a 3-Generation Testamentary Trust Will and a Superannuation Testamentary Trust children and minors get the more favourable ‘adult tax rates’.
Legal Consolidated trusts in your Wills allow the:
- children and minors to get income taxed at ordinary adult marginal rates
- the low-income tax offset.
The combined effect of this is that a child gets over $20k of income from a Legal Consolidated 3G Testamentary Trust. This is without paying one cent in income. And you can do this for up to 80 years from your death. Or longer in South Australia. This includes your beneficiary’s grandchildren and great-grandchildren – 3 Generations.
Quiz on Australian superannuation death taxes
Q 1: Is Superannuation automatically an asset in my Will?
A: Your superannuation is not an estate asset. It isn’t dealt with under your Will. However, change that by putting in place a Binding Nomination Death Benefit Non-lapsing. Just nominate your “Legal Personal Representative” (LPR). Your LPR is your executor named in your Will.
Q 2: When I complete my Superannuation Binding Nomination do I put in the name of my executors in my Will?
A: No. You only use three words: “Legal Personal Representative”. E.g. “Legal Personal Representative – 100%”
Q 3: The last update of my SMSF Deed was more than 5 years ago. Do I need to update it again so that my Death Benefits Nomination is binding?
A: Yes, you can update your SMSF Deed here.
Q 3: At death can I leave me superannuation directly to anyone I want?
No. Your Super can only go to spouses/de-factos, your children, financial dependants and interdependent. (And tax [free] dependants do not automatically include adult children.)
Q 4: But, at my death, I want to leave my superannuation to my brother, friend, parents and Church.
A: Well, in that case, get the super into your Will (see above). And then you can leave your super to whoever you want.
Q 5: At death, what are the only two ways that super is paid out?
Superannuation death benefits are paid as a lump sum or income stream. A death benefit cannot be retained by a beneficiary in the accumulation phase.
Q 6: At my death, can anyone take a superannuation income stream?
A: Only certain dependants receive a death benefit income stream or reversionary pension. They are a more limited group: spouse, financial dependant and interdependent. (But your child must be under 18, under 25 if financial dependant on you at the moment of your death, or older with a disability.
Q 7: At what moment of time do you decide if the person is a dependant for superannuation and tax purposes when I die?
A: At the moment of your death.