Payment of death benefit from superannuation can be complex because you not only have to consider who receives the benefit, but also how to give them the benefit, whilst considering the tax implications that may apply. It’s not the most exciting part of your financial house, but it’s an important aspect that must be completed.
What is a Binding Death Benefit Nomination?
A binding death benefit nomination (BDBN) is a legally binding nomination that instructs the trustee as to whom you would like to receive your superannuation benefit in the event of your death. Nominated beneficiaries must be eligible dependants and/or a Legal Personal Representative, such as your estate, in order to be “binding”.
There are two types of binding death benefit nominations:
- Lapsing nomination is valid for 3 years from the date of the signed document, meaning they must be refreshed every 3 years, otherwise it will lose its “binding status”.
- Non-lapsing nomination does not expire and will remain in place indefinitely until you change or revoke it.
Who can I nominate as my super beneficiary?
For your binding nomination to be valid, you must nominate one or more dependants and/or your Legal Personal Representative to receive your super. Eligible beneficiaries include:
- A current spouse (including de facto);
- Children (of any age);
- A person who is financially dependent with the member;
- A person in an interdependency relationship with the member.
If you don’t have any dependants, your superannuation death benefit will be paid to your Legal Personal Representative and be dealt with by your estate (executor of your will) and any funds will be dispersed as per the instructions of your Will.
Who Can Witness a Binding Nomination?
For a binding death benefit nomination to be valid, it must be witnessed by two people prior to submitting it to your super fund. The two witnesses must be over the age of 18 and neither can be listed as nominated beneficiaries on the form or the executor of your estate your Legal Personal Representative is nominated.
What is a Non-Binding Death Benefit Nomination?
If you try to nominate someone outside the eligible beneficiaries, it’s non-binding on the super fund. A non-binding death benefit nomination means the trustee of your super fund is not legally bound to pay your death benefit according to your nomination instructions. The trustee will consider your nomination, but ultimately, the trustee has a final say over distribution.
Benefits of Binding Death Benefit Nomination
The assets of the deceased are dispersed in accordance with their wishes. As superannuation does not form part of the deceased’s estate, it may not be accounted for by the deceased’s Will.
Making a superannuation death benefit nomination thus enables a superannuation member to direct their superannuation death benefits to their preferred dependant, rather than relying on trustee discretion to distribute their superannuation assets.
Binding Death Benefit Tax Implications
Tax laws use similar definitions of ‘dependant’ for the taxation of superannuation death benefits. Taxation treatments depend on how the benefit is paid (lump sum or income stream), who the beneficiary is, how old they are, and the tax components of your super.
You are a tax dependant of the deceased if you were:
- Their current or former spouse;
- A child (under the age of 18);
- A person in an interdependent relationship.
Lump sum
If a superannuation benefit is paid as a lump sum:
- Tax dependants will receive the whole benefit tax-free, regardless of the underlying taxable components.
- For non-tax dependents, tax will only be payable on any taxable component. The tax you pay is either the effective tax rate on the taxable components or your marginal tax rate, whichever is lower.
|
Beneficiary |
Tax-free component | Taxable Component | |
| Taxed Element | Untaxed Element | ||
|
Tax Dependant |
Tax-free | Tax-free | Tax-free |
|
Non-dependant |
Tax-free | Up to 15%* | Up to 30%* |
*Medicare levy may also apply for individuals.
Reversionary BDBN (Income Stream)
When nominating or paying a death benefit as an income stream, the available balance of the surviving dependent’s transfer balance cap must be considered (currently $1.7m for an individual at the time of writing). The receiving beneficiary of the superannuation beneift must have availability in their transfer balance cap to receive a reversionary pension. If not, the balance needs to be paid out as a lump sum.
|
Age |
Tax-free component |
Taxed Element |
Untaxed Element |
| Both beneficiary and deceased are under 60 years old | Tax-free | Your marginal tax rate less a 15% offset* | Your marginal tax rate* |
| Beneficiary is more than 60 years old, or the deceased was 60 years old or older | Tax-free | Tax-free | Your marginal tax rate less 10% offset* |
*Medicare levy may also apply for individuals.
Also note that different rates of tax may apply if a death benefit is received from a defined benefit fund.
