Key Highlights

  • Superannuation death benefits generally include a deceased member’s remaining super and any applicable insurance benefits.
  • Eligible dependants may receive a death benefit as either a lump sum or an income stream, while non-dependants generally receive a lump sum.
  • Binding and non-binding beneficiary nominations can affect how a Superannuation death benefit is distributed.
  • Special transfer balance cap rules apply to death benefit income streams, including modified arrangements for eligible child recipients.

Superannuation Death Benefits and Beneficiary Rules

Superannuation Assets generally do not form part of a deceased member’s estate automatically. When a person dies, their super fund generally pays the remaining superannuation balance and any applicable insurance benefits as a death benefit to a nominated or otherwise eligible beneficiary.

Where permitted by the fund’s rules, members can make either a binding or non-binding death benefit nomination. A binding nomination can direct the benefit to one or more eligible dependants or to the deceased member’s legal personal representative. A non-binding nomination does not necessarily determine the final recipient, as the Trustee may exercise discretion when deciding how the benefit is paid.

Where there is no nomination, the fund trustee may also determine which eligible dependant or dependants receive the benefit, or may pay it to the legal personal representative for distribution under the deceased person’s will.

Payment Options Depend on the Recipient

The payment structure depends partly on whether the beneficiary is considered a dependant under superannuation law. A dependant can generally receive a death benefit as either a lump sum or an income stream. A person who is not a dependant must generally receive the benefit as a lump sum.

For superannuation purposes, dependants include a spouse or de facto spouse, a child of the deceased of any age, and a person in an interdependency relationship with the deceased. An interdependency relationship generally involves a close personal relationship, living together, financial support and domestic support or personal care.

Tax legislation applies its own definition of dependant. This can include a former spouse or de facto spouse, a child under 18, a person in an interdependency relationship and another person who was financially dependent on the deceased.

Death Benefit Income Streams and Transfer Balance Caps

Death benefits can be paid through an income stream, but specific restrictions apply. Children can generally receive a death benefit income stream while under 18, or between 18 and 25 if they were financially dependent on the deceased. A child with a permanent disability can continue receiving an income stream after turning 25.

The transfer balance cap also affects death benefit income streams. This cap limits the amount that can generally be transferred into retirement-phase accounts. The timing and amount of a transfer balance Credit depend on whether the death benefit income stream is reversionary or non-reversionary.

For a reversionary income stream that commenced on or after 1 July 2017, the transfer balance credit generally arises 12 months after the original member’s death. The credit is based on the value of the income stream at the date of death.

For a non-reversionary death benefit income stream, the credit generally arises when the beneficiary becomes entitled to the income stream, with the relevant value determined at that time.

Special Rules for Child Recipients

Children receiving death benefit income streams are subject to modified transfer balance cap arrangements. Their modified personal cap is generally based on cap increments associated with the deceased parent’s superannuation interests.

The treatment can differ depending on whether the deceased parent had a transfer balance account and whether the relevant super interest was supporting a retirement-phase income stream. Where the deceased parent had an excess transfer balance immediately before death, the child’s cap increment can also be reduced by their share of the excess.

When an eligible child without a permanent disability reaches 25, remaining amounts generally need to be paid out of the superannuation system. A different rule applies to children with a permanent disability.

Conclusion

Superannuation death benefits involve rules covering beneficiary nominations, dependant status, payment methods and transfer balance caps. The treatment of a benefit can vary according to the recipient’s relationship with the deceased, the type of superannuation interest involved and whether an income stream is reversionary or non-reversionary. For child recipients, additional transfer balance arrangements can apply. The framework therefore places considerable importance on the nomination arrangements attached to a superannuation account and the circumstances of the beneficiary when the benefit becomes payable.