Treatment of superannuation and in particular, superannuation death benefits, continue to be front of mind for advisors and practitioners alike. This stems from continuous updates to legislation and case law dealing with the risks of not getting a superannuation death benefit nomination right. We take you through a summary of considerations when advising clients in this space.
Payment of superannuation death benefits
Superannuation death benefits can be paid in one of two ways, being either:
(a) a payment to the deceased member’s dependant – meaning the deceased’s spouse, child (of any age), or a person with whom the deceased had an interdependency relationship; or
(b) payment to the deceased’s legal personal representative – in practice, a payment to the estate of the deceased to be distributed in accordance with the wishes contained in their will.
Taxation of superannuation death benefits
The subsequent taxation of the benefit depends on whether it is ultimately received by a death benefit dependant (DBD) (which differs from a dependant) or someone that is not a DBD. Put simply, if the death benefit is received by a DBD, there are additional taxation concessions available as opposed to a payment to a person that is not a DBD – ultimately, the difference is either 15% or 30% tax on the taxable component of the benefit.
In this scenario, a DBD includes the deceased’s spouse, child under the age of 18, someone in an interdependency relationship with the deceased prior to death, and any other person who was a dependant just before the deceased passed away.
From these basic propositions, there are a number of considerations which arise with respect to who the benefit should be paid to, and how the benefits can then be treated. This includes:
(a) the consequences of paying the death benefit to a person’s estate, from a practical, estate and taxation perspective; and
(b) whether the death benefit can be paid through the estate to a testamentary trust, and the consequences of doing so.
Payment to a deceased estate
The ATO treats death benefits paid to an estate as though the payment had been paid directly to the beneficiary – with the important qualification that the estate pays the tax, not the beneficiary.
Whether the death benefit should be paid through the estate may depend on:
(a) Whether the intended recipient is non-dependant (not to be confused with a DBD).
Only a dependant of the deceased may receive a death benefit directly from a superannuation fund. If superannuation member intends someone who is not his or her dependant to benefit from a superannuation death benefit, then it can only be paid to the estate, and dealt with via the member’s will. The downside with this is the increase to estate assets, and thereby increase the likelihood of a family provision application. Alternatively, benefits paid directly to the dependant may remain outside the ambit of the estate (in Qld – different rules apply in NSW).
(b) The identity and number of executors of the deceased estate.
In the past five years, Australian courts have explored the obligations of executors and administrators who apply for a superannuation death benefit to be paid to them personally, instead of to the estate. In some circumstances, the courts have found that those actions resulted in a beach of the executor/administrator’s obligations and held that they be required to account for the death benefit to the estate.
Payment to a testamentary trust
It is common for a will to establish a testamentary trust over part of an estate, to provide much greater flexibility to the trustees in administering the estate. Unfortunately, the tax legislation does not specifically provide that the look through provisions available to an estate apply to the testamentary trust.
As an overarching concept, there is nothing that specifically prevents the look through provisions from applying to the taxation of the testamentary trust if a DBD is made entitled to the death benefit (via the TT), and they receive the funds. However, in these circumstances, the category of people that are not DBDs that may be expected to benefit is very likely going to grow in comparison to the estate, and a cautious trustee would pay tax on the basis that each of these people may benefit. In practice, this is likely to mean an additional 15% or 30% tax on the taxable component of the death benefit.
Current and continued considerations for payment of superannuation death benefits
There are various ways that concerns associated with the payment of a death benefit to an estate or a testamentary trust may be addressed. For example:
(a) a deceased member may execute a binding death benefit nomination in favour of their spouse (who will be the sole executor of their estate) and specifically provide that the spouse can pay themselves those monies through an estate (through a direct inclusion or direction in the deceased’s will); or
(b) a superannuation proceeds trust might be established, to keep the death benefit separate from a standard testamentary trust.
The best option will differ between individuals and estates, depending on the wishes of the parties’ involved. Given the complexities and competing priorities in this area, you should always seek specialist advice on the most appropriate manner in which a client should direct their superannuation death benefits upon death, to ensure no resulting issues for their estate and loved ones, through seemingly innocent actions such as spouses paying each other.
For further information on any of the issues raised in the alert, please contact a member of our tax team below.