Understanding tax implications of superannuation death benefits

When someone passes away, managing their remaining superannuation funds involves navigating several tax-related considerations.

In this article, we’ll shed light on the key tax aspects related to this situation without delving too much into legal intricacies.

1. Superannuation Industry (Supervision) Regulations (SISR) regarding death benefits

Regulation 6.21(1) of SISR states: “Subject to subregulation (3), a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.”  Subregulation (3) states “For the purposes of subregulation (1), it is sufficient if, instead of being cashed, the benefits are rolled over as soon as practicable for immediate cashing.”

In other words, we operate under the premise that a member’s benefits in a regulated superannuation fund must be cashed “as soon as practicable” after their demise. This term lacks a strict definition and hinges on various factors like identifying beneficiaries, understanding the deceased’s financial affairs, legal processes, and potential disputes.

While delays are acknowledged, the Australian Taxation Office (ATO) expects trustees to exert significant efforts for prompt death benefit processing. A general guide suggests that payment within 6 to 12 months post the date of death complies with the “as soon as practicable” requirement.

Cashing death benefits

Superannuation death benefits can be paid as lump sums, either single or interim and final, or as pension streams or annuities. However, these payouts should comply with specific limitations, allowing a maximum of two payments for lump sums.

2. Recipients of superannuation death benefits

Regulation 6.22(1) of SISR outlines that, with certain provisions considered, a member’s benefits cannot be cashed for someone other than the member or the member’s legal personal representative unless specific conditions are met. These conditions include cashing benefits for the legal personal representative or one or more of the member’s dependants.

The term “dependant” includes a spouse, children, or individuals in an interdependent relationship. Notably, death benefit income streams must be paid to dependants, subject to specific conditions and caps.

3. Various definitions in tax legislation

Understanding tax implications involves delving into definitions:

  • Taxable and tax-free components: The taxable component typically includes employer contributions, personal contributions with tax deductions, and earnings on contributions and investments. It can further be divided into taxed and untaxed elements, each subject to specific tax rates.
  • Superannuation death benefits: Defined under Division 302, this term encompasses payments from a superannuation fund following a member’s death.
  • Death benefits dependant: In essence, the spouse, child, or anyone with an interdependency relationship or dependency status before the member’s death.
  • Superannuation income stream benefit: This refers to benefits paid from a superannuation income stream, encompassing pensions for SISA purposes.

4. Cessation of income stream upon member’s death

When a member receiving a superannuation income stream passes away, the ATO considers the income stream to cease, except when it automatically transfers to an eligible dependent. This automatic entitlement can occur through the fund’s deed or a valid nomination.

Transition to retirement income streams (TRIS) can also smoothly transfer to eligible dependents without requiring commutation, ensuring continuity of income streams.

Importantly, if the superannuation income stream generates exempt current pension income (ECPI), earnings on investments post the member’s death remain tax-exempt. This facilitates tax exemption until the benefits are cashed as a lump sum or a new income stream is initiated.


The information in this paper is not advice. The information in this paper is intended to be educational only. No person should rely on the educational information in this paper in relation to their taxation or financial affairs. You should only undertake transactions following the provision of advice from a suitably qualified adviser who has considered the particular facts involved with your circumstances.

Contact KMT advisers if you need assistance with your superannuation!

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