Julie Dolan revisits the basic rules governing the payment of death benefits.

When it comes to who can receive a death benefit and the subsequent tax liability, it is at times important to go back to the basics.

Regulation 6.22 of the Superannuation Industry (Supervision) (SIS) Regulations determines who can receive a death benefit of the deceased member. The trustee can pay a death benefit to any dependant or to the legal personal representative (LPR) of the estate.

Section 10 of the SIS Act defines who is a dependant and includes the deceased’s spouse, children of any age and any person who was in an interdependency relationship with the deceased at the time of death.

The definition of dependant is inclusive and hence covers a dependant within the ordinary meaning of the word. This therefore includes financial dependency and can be partial when looking at the SIS Act definition as shown in Faull v Complaints Tribunal (1999).

The SIS Regulations also determine the form in which benefits can be paid under sub-regulation 6.21(2). The form of cashing a death benefit needs to be any one or more of the following:

• In respect of each person to whom benefits are cashed: − a single lump sum, or − an interim lump sum and a final lump sum.

• One or more pensions or the purchase of one or more annuities, payable to an entitled recipient.

An entitled recipient is defined under subregulation 6.21(2A) as:

• a spouse,

• a person who was financially dependent on the deceased, but not including the deceased’s children,

• a person with whom the deceased was in an interdependency relationship, but not including the deceased’s children,

• a child of the deceased but only if the child is disabled, under age 18 (at the time of death) or between ages 18 and 25 and financially dependent on the deceased.

The taxation treatment is dependent on firstly whether the recipient is a death benefits dependant as defined under section 302-195 of the Income Tax Assessment Act (ITAA). A death benefits dependant is similar to a SIS Act dependant except for a couple of exceptions. In relation to children, a child of any age is a SIS Act dependant, but under the tax act, only children under the age of 18. Over the age of 18, they must either be in an interdependency relationship or fully financially dependent at the time of death of the member. A former spouse is the other main exception. Under the SIS Act, a former spouse is not a dependant, but under the ITAA that person is. Therefore, for the payment to a former spouse to be tax-free, the payment must go via the estate or personally if demonstrated to be financially dependent at the time of death on the member under the SIS Act.

The remaining considerations are the tax components of the death benefit and in what form the benefit will be paid, by pension and/or lump sum.

The taxable component of a lump sum death benefit paid to a dependant is tax-free. It is classified as a non-assessable non-exempt payment. If the payment is to a non-tax death benefits dependant, that is, a financially dependent adult child, the taxable component is taxed at 15 per cent and the untaxed element at 30 per cent.

If the payment is made as a death benefit pension to a dependant, the taxable component of the pension payment is treated as follows:

• either the deceased or pension recipient is aged 60 or over at time of the member’s death. Tax free – non-assessable non-exempt income, or

• deceased or pension recipient is under the age 60 at the time of the member’s death. Taxed at pension recipient’s marginal tax rate with a 15 per cent tax offset.

Death benefit pensions cannot be paid to individuals who do not fit the definition of a dependant.

When it comes to implementation of the above, the current trust deed of the fund is crucial. It is also critical to review the trail of control documentation, such as binding death benefit nominations and reversionary pensions, to determine if any documents are in conflict with the deceased wishes.

To avoid conflicts of interest, family disharmony and even potential court disputes, planning while your client is alive is essential. There are many benefits from proper planning. Three main ones being:

• thoughtful decisions – planning can help your client think through and express what really is important to them,

• a roadmap – planning can help create a set of key priorities and a checklist of the critical points that need to be addressed, and

• collaboration – a good plan allows for conversations with family, friends and other professional advisers.