Superannuation death benefits

The ATO views this industry practice as a breach of the compulsory cashing requirement that applies to death benefit pensions. However, the ATO issued Practical Compliance Guideline 2017/6 allowing for relief in relation to this practice for commutations which took place before 1 July 2017.

Since1 July 2017, if a death benefit is taken as an income stream, it can’t be commuted and rolled back to accumulation at any stage. It can be commuted and rolled over to another fund if the beneficiary is eligible to receive a death benefit income stream.

Once the death benefit is rolled over to the new fund, it must immediately be taken as a death benefit income stream or a lump sum and can’t be held in accumulation phase.

If a death benefit is rolled over and received in another super fund, the tax treatment for the beneficiary won’t change. This provides a significant benefit to clients who hold insurance and accumulated monies within super funds that don’t pay death benefit income streams.

Death benefit income streams if paid to a dependant other than a child

Superannuation death benefits received as a pension count towards the receiving beneficiary’s transfer balance account (TBA). If a client has a superannuation RP income stream and therefore, has a TBA and they then receive a death benefit pension, the total rolled over to a RP income stream cannot exceed the client’s unused TBC amount.

Where the recipient spouse will exceed their TBC upon receiving a death benefit income stream, they can roll their own pension back to accumulation if they want to retain the money in superannuation. Alternatively, they could either receive the death benefit as a lump sum or commute their own pension as a lump sum and then receive the death benefit as an income stream.

Example 1

Harry and Jemima are a married couple. On 1 July 2017, they both commenced an account based pension with a balance of $1.6 million each.

On 1 September 2023, Harry passed away. At this time, both of their account based pensions were valued at $1.5 million each. If Jemima receives Harry’s account based pension as a death benefit income stream whilst still holding her own account based pension, she would exceed her personal TBC of $1.6m.

Jemima commuted and rolled back her account based pension of $1.5 million to accumulation phase. She then commenced a death benefit pension from the proceeds of Harry’s $1.5 million death benefit account. This means she stayed within her personal TBC.

Example 2

Tim and Janine are a married couple. On 1 July 2017, they both commenced an account based pension with a balance of $1.6 million each.

On 1 September 2023, Tim passed away. At this time, both of their account based pensions were valued at $1.7 million each. If Janine receives Tim’s account based pension as a death benefit income stream whilst still holding her account based pension, she would exceed her personal TBC.

Janine commuted and rolled back her account based pension of $1.7 million to accumulation phase. This reduced Janine’s TBC to negative $100,000. She then received Tim’s death benefit account based pension of $1.7 million. This allowed her to stay within her personal TBC of $1.6 million..

Reversionary pensions vs non reversionary pensions

The starting balance of a non-reversionary death benefit pension counts towards the TBC of the recipient as soon as the death benefit pension commences.

On the other hand, when a reversionary death benefit pension is received, the balance of the pension at the time of death of the original account holder will be credited to the beneficiary’s TBA, 12 months after the date of death. This provides the death benefit recipient some time to work out how they would like to receive the death benefit, and perhaps move some of their own pension monies back to accumulation phase if necessary.

Child pensions can only be commenced for an amount up to the available TBC of the minor beneficiary. This is referred to as a ‘transfer balance cap increment’.

The amount which can be paid to an eligible child without exceeding the child’s TBC increment depends on whether or not the parent had a TBA, which in turn depends on whether or not the parent had already commenced a RP income stream.

When the deceased parent does not have a transfer balance account

If a death benefit income stream is paid to a child or children from the parent’s accumulation benefits, and the parent does not have a TBA then the child/ren can receive an income stream for an amount up to their proportion of the death benefit multiplied by the general TBC. This means that the total amount rolled over to their income streams cannot exceed the general TBC at that time.

A transition to retirement income stream does not count towards a person’s TBC. For this purpose, it is considered to be in accumulation phase and is not a retirement income stream.

Example 3

Janine was a single mother who had $2 million in super benefits, which were all in accumulation phase. She passed away on 1 August 2023 when the general TBC equalled $1.9 million. She nominated her two children, Angela (age 12) and Marcus (age 15) to receive her death benefits equally (50% each).

The children can receive a death benefit pension of $950,000 each (i.e. $1.9 million x 50%) without exceeding their TBC. The remaining amount of $100,000 needs to be paid out as a lump sum death benefit.

Example 4

Bill is aged 57 and has $900,000 in a transition to retirement income stream. He has a de-facto spouse and also one child from a former marriage, who is aged 16.

He nominated his child to receive his entire super death benefit. He passed away on 1 October 2023. His child was able to receive a death benefit income stream for $900,000 without exceeding their TBC.

When the deceased parent had a transfer balance account

If a parent had a TBA at the time of their death and a death benefit income stream is paid to a child or children, then the child/ren of the deceased parent can receive a death benefit income stream up to their proportionate share of the deceased parent’s RP income stream monies.

They cannot receive any amount from accumulation phase as a death benefit pension.

Any insurance proceeds paid from super will always be deemed to be sourced from the accumulation phase. This means that a child can only receive the insurance benefit as a lump sum in the case where the deceased parent had a TBA.

Example 5

David is age 62 with two children. He had $1 million in an account based pension. He also had $500,000 in accumulation phase. He passed away on 1 September 2023. He had nominated his two children, Adrian and Melissa to receive his superannuation benefits. Adrian was nominated to receive 60% whilst Melissa was to receive 40% of the total benefits. Adrian can receive a death benefit income stream of $600,000 while Melissa is able to receive a death benefit income stream of $400,000. Adrian and Melissa will need to take the amount of $500,000 from accumulation as a lump sum benefit.

Example 6

Mary passed away at age 52 on 1 December 2023. Mary had previously commenced an account based pension on 1 July 2017 with a balance of $1.6 million, due to being totally and permanently disabled. At death, her pension was valued at $2 million and the general TBC was $1.9 million. She had no monies in accumulation phase. She left her superannuation death benefit to her 14 year old daughter, Amelia. Amelia was able to receive the entire amount as a death benefit pension.

Example 7

On 1 June 2023, Emma (aged 16) received a death benefit income stream of $1.6 million when her father passed away. The income stream is within Emma’s TBC increment as her father had $1.6 million in an account based pension at the time he passed away.

On 1 July 2023, Emma’s mother also passed away. Emma’s mother had $500,000 in accumulation phase only. As Emma’s mother did not have a TBA, Emma can receive the amount of $500,000 as a death benefit income stream and this will be within her own TBC increment.

^ This is regardless of whether this amount is over the general TBC amount.

* This is regardless of how much the child already has as an income stream if the income stream/s were received as a result of the death of their other parent.