A lump sum superannuation death benefit paid to someone who is not a death benefits dependant for tax purposes can be subject to significant tax (refer to Table 1 for details). In contrast, lump sum death benefits paid to someone who does qualify as a death benefits dependant for tax purposes are entirely tax free.
As a result, clients often want to claim that certain beneficiaries e.g. parents, adult disabled children, siblings and grandchildren are dependants for tax purposes.
Table 1. Taxation of lump sum superannuation death benefits
Whether someone is a death benefits dependant or not is a question of fact; the super fund trustee or the executor of the estate (where death benefit paid via estate) is required to make an assessment at the time of payment. The onus is then on the individual making the claim to provide evidence to establish that they were a tax "dependant" at the time of death.
Where the beneficiary is a spouse, former spouse or minor child it is clear they qualify as a tax dependant. However for beneficiaries who are looking to qualify under the "interdependent relationship" or "financial dependant" criteria, the outcome is less certain.
A good understanding of the qualification criteria is useful for advisers when guiding clients through the claim process. Furthermore, preparation such as obtaining statutory declarations and keeping records of financial transactions and support may become imperative at claim time.
It's important to note that "dependant" is defined differently under the SIS Act (super law) and the Income Tax Act (taxation law). Broadly speaking, super law sets out who a death benefit can be paid to directly from a super fund and taxation law sets out how the benefits will be taxed. The focus of this article is on the definition of a dependant for tax purposes. Refer to Appendix 2 for a comparison of SIS dependants and tax dependants.