Death Benefit Tax

Death benefit tax applies to super death benefits paid to non-dependants, mainly adult children. The tax sits on the taxable component of the benefit. Tax dependants always receive super death benefits tax-free.

Death benefits from retail life insurance (held outside super) are tax-free in every case, regardless of who receives them. This is the headline planning difference between in-super and out-of-super life cover.

Tax rate by beneficiary and component

| Beneficiary | Component | Tax rate (taxed element) | Tax rate (untaxed element) | |---|---|---|---| | Tax dependant | Both | 0% | 0% | | Non-dependant | Tax-free | 0% | 0% | | Non-dependant | Taxable | 17% (15% + 2% Medicare) | 32% (30% + 2% Medicare) |

The taxed element comes from contributions where 15% contribution tax was paid. The untaxed element usually arises from public-sector or untaxed funds and is rare in retail super.

Non-dependants cannot receive a super death benefit as an income stream. They must take it as a lump sum, so the tax is realised immediately.

Worked example: $1,000,000 super death benefit to adult child

• Setup: $800,000 taxable component, $200,000 tax-free component, paid to adult son (non-dependant)
• Tax on $200,000 tax-free component: $0
• Tax on $800,000 taxable component: $800,000 × 17% = $136,000
• Net to son: $864,000

If the same $1,000,000 had been retail life insurance paid outside super, the son would receive the full $1,000,000 tax-free.

Common planning options

1. Hold life cover outside super so the benefit is tax-free to any beneficiary
2. Withdraw super from age 60 to crystallise a tax-free outcome before death (subject to your living expenses)
3. Make non-concessional contributions late in working life to lift the tax-free component
4. Set up a binding death benefit nomination to direct the benefit to a tax dependant where one exists

This is general information about tax mechanics; estate planning is complex and outcome depends on individual circumstances. Authority: Income Tax Assessment Act 1997, Division 302 and Taxation Ruling TR 2010/1.