When superannuation is paid as a death benefit, the tax outcome depends on who receives it. While spouses and some adult children may qualify as dependants for superannuation purposes, nephews are not considered dependants under superannuation law. As a result, super benefits paid to them are generally subject to death benefits tax.

Superannuation balances are made up of two components: a tax-free component, which typically arises from after-tax personal contributions, and a taxable component, which includes employer contributions, salary sacrifice contributions and investment earnings. For many long-held superannuation accounts, particularly capital-guaranteed products, the taxable component often represents the majority of the balance.

When superannuation is paid to a non-dependant, a tax of 15 per cent applies to the taxable component. In some circumstances, an additional Medicare levy may also apply, bringing the effective tax rate to 17 per cent. This tax can be deducted either when the superannuation benefit is paid into the estate or when it is ultimately distributed to the beneficiaries.

Importantly, changing a death benefit nomination so that the estate or legal personal representative receives the superannuation does not eliminate this tax. While this approach can provide flexibility in how assets are distributed under a will, it does not remove the superannuation death benefits tax when the final recipients are non-dependants.

In contrast, individuals aged 65 or over are generally able to withdraw their superannuation in full, tax-free, provided they are not members of certain public sector defined benefit schemes. At age 73, this condition is satisfied. Once withdrawn, the money ceases to be superannuation and becomes ordinary personal savings.

This creates a planning opportunity. If superannuation is withdrawn during the individual’s lifetime and held in a bank account, term deposit or other personal investment, it can later be gifted or left under a will to beneficiaries without any superannuation death benefits tax. This approach can potentially save a substantial amount of tax, particularly where the taxable component is large.

However, once funds are held outside superannuation, any income earned such as bank interest becomes assessable personal income and is taxed at the individual’s marginal tax rate. While this needs to be managed as part of an overall cash flow and tax strategy, it is often a relatively small trade-off compared to the potential tax saving on the superannuation balance itself.

Investment performance is another relevant consideration. Capital-guaranteed superannuation products often deliver very low returns, particularly in a higher interest rate environment. For older members, remaining invested in such products for extended periods can significantly erode real purchasing power and limit the effectiveness of retirement and estate planning strategies.

For individuals acting under a power of attorney, there is a responsibility to act in the person’s best interests. Reviewing low-return superannuation products, assessing unnecessary tax exposure on death, and considering whether withdrawing superannuation is appropriate are all legitimate considerations within that duty.

Overall, this scenario demonstrates the importance of coordinating superannuation, tax and estate planning. Decisions around death benefit nominations, withdrawal timing and investment structure can materially affect outcomes for beneficiaries, particularly where intended recipients are not superannuation dependants.

If you would like more information on this, please reach out to Cadre Capital Partners.