How does your Superannuation fit into your Estate?

Your superannuation, along with any life insurance it contains, is classified as a non-estate asset. This means that you have to decide how you want your superannuation benefits to be distributed and can’t just assume that it will be distributed in line with the provisions outlined in your Will.  

To simplify matters for your family and avoid legal complications, you can nominate a beneficiary to receive your superannuation death benefit. This can include your spouse, children, interdependent, other financial dependents, or your legal personal representative (your Estate).

Nominations can take various forms, such as binding, non-binding, or reversionary options, depending on your superannuation fund.

IMPORTANT NOTE: Not designating a beneficiary leaves your super fund with discretion on how the death benefit is distributed, subject to legal provisions and regulations.

How do you decide?

Deciding whether to nominate your estate or your dependents directly involves a lot of thought and understanding of the trade-offs involved. It is important that you seek advice from a Solicitor and your Financial Adviser to make the right decision based on your specific circumstances.

That said, there is a trade-off that is not often taken into consideration when deciding how you want to distribute your super death benefits.

Superannuation death benefits can have specific implications for recipients, especially in the context of the Division 293 tax. Division 293 tax is intended to ensure that individuals with higher incomes are taxed more on their concessional superannuation contributions than those on lower incomes.

When a non-tax dependent beneficiary directly receives a superannuation death benefit, it increases their income for the purpose of the Division 293 tax calculations.

Let's dive into a numerical example to illustrate the impact of super death benefits on a recipient's Division 293 tax.

At present, the Division 293 tax threshold is set at $250,000.

This means that individuals with an adjusted taxable income and concessional superannuation contributions combined exceeding this amount will be subject to additional tax on their concessional contributions.

For Example:

‍Consider Tom, who has an adjusted taxable income of $140,000 for a specific financial year.

He has also received employer SG contributions of $15,400 and personal deductible contributions of $12,100 to his superannuation.

Without any additional income, Tom would not be subject to the Division 293 tax.

However:

‍Let's say Tom receives a direct superannuation death benefit of $200,000 from a parent in the same year.

Not only will his overall taxable income increase, but the death benefit will push his adjusted income, for Division 293 tax purposes, to $367,500, which is $117,500 over the threshold.

This means that Tom’s entire super contributions will be taxed at both the standard contributions tax of 15%, plus the Division 293 Tax of 15%.

Alternative:

However, had Tom's parent had their super death benefit paid to their Estate, instead of Tom directly, the death benefit tax would have paid by the Estate and Tom would have received net benefits without impacting his taxable income, and therefore no Division 293 Tax implications.

As you can see, choosing the right death benefit nomination is vital. You need to consider not only how you want your capital to be distributed, but also how this will impact the beneficiary from a tax perspective.

‍IMPORTANT

Division 293 Tax is only one 'trade-off to consider. It is vital that you speak with your Solicitor and Financial Adviser to decide how best to distribute your superannuation benefits.

‍