When I’m considering a client’s estate planning, it’s not just about considering their Will. It’s necessary to take a holistic approach, and it’s critical that your solicitor does so.

An estate plan is not only about preparing a Will. A number of factors must be considered including (but not limited to):

1. A client’s family tree – their spouse, child, former spouses and their dependents;
2. A client’s assets and liabilities – especially whether assets are owned solely or jointly;
3. A client’s corporate structure – what companies or trusts does the client control or have an interest in;
4. A client’s superannuation – is there a superannuation with an industry fund or is there a self-managed superannuation fund;
5. A client’s life insurance – is there a sole or joint policy and are there any conditions on payment;
6. Whether there is an intention to leave someone out of the Will, and if so, who.

In this blog, I will highlight a common oversight or misunderstanding I often see my clients make – and in some scenarios it can be an expensive oversight, that is, the tax that is applicable to your superannuation funds on death, if they are paid to someone other than a tax dependent.

Who is considered your tax dependent?

A tax dependent includes:

1. your spouse including de facto spouse;
2. your children under the age of 18 years;
3. an interdependent – that is, someone who is not your spouse or child, but you live together and provide both financial support and domestic support to each other; and
4. a person who is substantially financially dependent on you – that is, someone who relies on you to meet their normal living expenses. For example, someone who you make regular payments to, or cover their living expenses.

When a person dies and at the time of death, they have funds in a superannuation fund (either an industry fund or a self-managed superannuation fund), the funds can only be paid to one of the above categories of person, tax free.

If your superannuation death benefit is paid to anyone else (other than a tax dependent), they will be subject to tax.

How is your superannuation dealt with in the event of death?

Where a person dies, having superannuation funds remaining, generally those funds are paid out as follows:

• If the member has a valid Binding Death Benefit Nomination, the funds are paid to the beneficiary nominated in the form. A Binding Death Benefit Nomination is a document the member submits to the superannuation fund setting out who they would like to receive their superannuation on death. In a Binding Death Benefit Nomination, the member is only permitted to nominate their legal personal representative or a dependent.

• If the member did not leave a Binding Death Benefit Nomination, it will be left to the trustee of the superannuation fund to determine who will receive the superannuation funds of the deceased member. Generally, there is process of how the trustee must made this decision set out in the superannuation fund trust deed.

In the absence of a Binding Death Benefit Nomination who might receive your superannuation death benefit?

1. The legal personal representative of the deceased

The trustee of your superannuation fund may elect to pay the superannuation funds to the legal personal representative. 

This means the funds will be paid to the executor or administrator of your estate.

Where this occurs, the funds will form part of the deceased’s person’s estate and will be distributed in accordance with their Will, or the division on intestacy (this is where the deceased person does not have a Will and legislation determines how their estate is distributed).

2. Your dependent

The trustee of your superannuation fund may elect to pay the superannuation funds to one or some of your dependents.

This means the funds will be paid to them personally.

Where this occurs, the payment will be a personal payment to the dependent person.

However, it is critical to keep in mind that tax follows the beneficiary. Therefore, if a person other than a tax dependent receives your superannuation, it will be subject to tax.

What is the tax rate applicable to the payment if a non-tax dependent receives your superannuation?

The tax rate presently between 15% – 32.5%. 

Example

To provide an example, I have set out a scenario below.

Sally is 45 years of age and passes in an accident. At the time of her death, she is not married and does not have any children or dependents.

Sally does not have a Will.

Sally is survived by her parents, Jack and Jill who take control of her estate.  Jack and Jill apply to the Court to become the administrators of Sally’s estate. As Sally did not have a Will, Jack and Jill are the beneficiaries of Sally’s estate in equal shares (as set out in the Succession Act 1981 (Qld)).

Sally has $205,000 in superannuation as a member balance and also a death benefit of $250,000.  Sally did not leave a Binding Death Benefit Nomination.

Jack and Jill liaise with Sally’s superannuation fund to call in her superannuation funds (both her member balance and her death benefit (a total of $455,000).

As Sally did not leave any dependents, the trustee of the superannuation fund elects to pay the total sum (called the death benefit) to Jack and Jill as the legal personal representatives of Sally’s estate.

As both Jack and Jill are not tax dependents of Sally, the superannuation is subject to tax. Assuming there are no tax concessions, the death benefit will be subject to 32.5% tax, totalling $147,185.

If you are administering an estate where there is a death benefit being paid to the legal personal representatives it is critical to ensure you have received advice in relation to the payment of tax. There is a risk of personal liability to the executor or administrator of the estate if tax is not paid. If you have any questions, please do not hesitate to contact me.