Understanding super inheritance tax in Australia: What you need to know

Inheritance tax can be a confusing topic, especially regarding superannuation. While Australia abolished death duties many years ago, taxes associated with superannuation death benefits can impact how much of your loved one’s super you receive. 

This guide will break down the key points around super inheritance tax in Australia so you better understand how it works and how to plan ahead.

Do you pay tax on inheritance when someone dies?

When someone passes away, their super balance is not automatically included in their will. Instead, it is paid out as a super death benefit to their beneficiaries. The amount of inheritance tax you may owe on a super death benefit depends on several factors:

• Whether the super is taxable or tax-free
• If the beneficiary is a dependent under tax law
• How the benefit is paid – either as a lump sum or an income stream.

Super death benefits are designed to provide financial support to dependents, such as spouses or children. However, if you are not a tax-dependent, you may face taxes on any inheritance from the super, particularly the taxable portion.

Who pays inheritance tax on super?

Not all super beneficiaries are taxed equally. Generally, tax dependents, such as spouses and children, can receive the benefit tax-free because inheritance law in Australia considers them financially reliant on the deceased. 

Other beneficiaries, such as financially independent adult children, may be subject to inheritance tax on the taxable component of the super death benefit.

Here’s a breakdown of the two main components of superannuation:

1. Tax-Free Component: This portion is always tax-free, regardless of the beneficiary’s status.
2. Taxable Component: This portion can be taxed at different rates:
   • 17% (including Medicare Levy) on the taxed element
   • 32% (including Medicare Levy) on the untaxed element

However, it’s important to remember that tax dependents (like spouses and children under 18) can receive this taxable component without owing any inheritance tax. On the other hand, non-tax dependents, such as financially independent adult children, will face taxes on this portion.

Choosing beneficiaries for your super 

Ensuring your super goes to the right person is crucial in avoiding unwanted taxes or legal issues. You need to nominate a beneficiary for your super account to do this. 

A binding nomination allows you to choose who will receive your super after your death. This nomination can either lapse (after three years) or be non-lapsing.

If you do not make a nomination, the super fund trustee will decide who receives the benefits. This can be based on their discretion, often considering your dependents or legal personal representative. However, this may not align with your wishes, especially if the trustee distributes the super contrary to what is written in your will.

Tax implications based on beneficiary type

The amount of inheritance tax paid on a super death benefit depends largely on whether the recipient is a tax-dependent or not. Here’s a quick breakdown:

• Tax Dependents (e.g. spouses, children under 18, financially dependent individuals) can receive the entire super death benefit tax-free, whether paid as a lump sum or income stream.
• Non-Tax Dependents (e.g. financially independent adult children, siblings) will pay tax on the taxable component of the super, as outlined earlier. This tax applies when the benefit is paid as a lump sum.

Does inheritance count as income in Australia?

For income streams, the tax treatment can differ. The payments will usually be tax-free if the deceased or the recipient is over 60. However, for beneficiaries under 60, the taxable portion of income streams will count as assessable income, with a 15% tax offset available until they reach 60.

Other FAQs about super inheritance tax

Are taxes applicable if I transfer inherited super into my own super account? 

No, inherited super cannot be directly transferred into your own super account. Instead, it must be taken as a lump sum or an income stream if eligible, with applicable taxes based on the type of benefit and beneficiary status.

What are the implications if you’re receiving inheritance and Centrelink payments? 

Inherited superannuation can impact Centrelink benefits, particularly if you receive an income stream or have funds added to your financial assets. Lump-sum inheritances generally do not immediately affect payments but may be counted under Centrelink’s assets or income tests after a certain period. It’s best to promptly report any inheritance to Centrelink to ensure accurate benefit calculations.

What happens to unclaimed inheritance? 

If superannuation benefits are unclaimed after a person’s death, they are typically held by the super fund or transferred to the ATO. The ATO administers unclaimed super and allows eligible beneficiaries to claim it by providing proof of entitlement. You can check with the ATO or relevant super fund if you believe you have an unclaimed inheritance.

Can inheritance impact my retirement plans or tax status? 

While there’s no strict legal deadline, beneficiaries should claim super inheritance immediately. Most super funds and the ATO encourage timely claims to avoid potential delays or complications. If the super remains unclaimed for a certain period, it may be transferred to the ATO, which can still be claimed but may require additional steps.

Understanding inheritance tax in Australia can make all the difference for your future

Super inheritance tax may not be well-known, but it can significantly impact the final amount beneficiaries receive. Understanding how this tax works and taking proactive steps to minimise it can make all the difference for your family’s financial future.

If you’re uncertain about the best strategy to minimise taxes on your super death benefit, consulting a financial adviser like Elliot Watson Financial Planning is always a good idea. Our team will guide you through the complex landscape of inheritance tax and help you implement a plan tailored to your circumstances.

For guidance on understanding super inheritance tax, contact Elliot Watson Financial Planning at 02 4038 1623 or complete our contact form. Our team will then contact you to book your first consultation.

Disclaimer

The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness regarding your objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

The views expressed in this publication are solely those of the author; they are not reflective or indicative of the licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the author’s express written consent.

Elliot Watson Financial Planning Pty Ltd and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.