When someone dies, their super balance (plus any insurance held inside super) becomes a death benefit paid to their beneficiaries. The tax on this death benefit depends on who receives it and which component of the super it comes from. Getting this wrong — or not planning for it — can cost beneficiaries tens of thousands of dollars in unnecessary tax.
Tax-free vs taxable components
Every super balance consists of two components:
- Tax-free component: Made up of non-concessional (after-tax) contributions and any pre-July 1983 component. This is always paid tax-free, regardless of who receives it.
- Taxable component: Made up of concessional contributions (SG, salary sacrifice, deductible contributions) and investment earnings. The tax on this depends on the recipient.
Tax treatment by recipient
| Recipient | Tax-free component | Taxable component (taxed element) |
|---|---|---|
| Tax dependant — spouse | Tax-free | Tax-free |
| Tax dependant — child under 18 | Tax-free | Tax-free |
| Tax dependant — financial dependant | Tax-free | Tax-free |
| Tax dependant — interdependency | Tax-free | Tax-free |
| Non-tax dependant — adult child | Tax-free | Up to 15% + 2% Medicare = 17% |
| Non-tax dependant — other (sibling, parent, friend) | Tax-free | Up to 17% |
Lump sum vs income stream
Death benefits can be paid as a lump sum or a death benefit income stream (pension). Income streams can only be paid to:
- A spouse (any age)
- A child under 25 (or a disabled child of any age)
- A financial dependant or person in an interdependency relationship
An income stream to a child must be commuted to a lump sum by age 25 (unless the child is disabled). For spouses, an income stream is often the most tax-efficient option — earnings on assets supporting the pension are tax-free.
Strategies to minimise death benefit tax
1. Pay to a tax dependant
The simplest strategy: ensure your binding nomination directs your super to a tax dependant (spouse is the obvious choice). All components are tax-free to a tax dependant.
2. Withdraw and re-contribute
If you're over 60, you can withdraw super tax-free and then re-contribute it as a non-concessional contribution. This converts the taxable component into a tax-free component — reducing future death benefit tax for non-tax-dependant beneficiaries. This strategy is limited by the non-concessional cap ($120,000/year or $360,000 bring-forward) and the transfer balance cap.
3. Equalise balances via spouse splitting
If one partner has a much larger super balance, contribution splitting over time can spread the taxable component across both accounts, reducing the concentrated tax hit on death.
4. Life insurance outside super
For wealth intended for adult children, consider holding life insurance outside super. The payout goes to the estate and is distributed per the will — with no super death benefit tax. The trade-off is that insurance premiums outside super are paid from after-tax income.
Nominations matter
Your beneficiary nomination determines who receives your super death benefit. Without a valid binding nomination, the trustee decides — and their decision may not align with your wishes or tax planning.
Related guides
- What happens to super when you die
- Beneficiary nominations explained
- Spouse contribution splitting
- How super is taxed