Superannuation is one of Australia’s most tax-effective ways to save for retirement. But what happens when your super is paid out after you pass away? The answer isn’t always straightforward. Depending on who receives your benefit and the components of your super, tax can significantly reduce the amount your loved ones receive. With the right planning, however, it’s possible to minimise this tax and save your family thousands.
The Basics: Who Pays Tax and Why
Superannuation death benefits are paid to your beneficiaries as either a lump sum or an income stream. How much tax applies depends on two key factors:
Who receives the benefit:
- ·Dependants for tax purposes (spouse, de facto partner, children under 18, or someone financially dependent): benefits are generally tax-free.
- ·Non-dependants (adult children, siblings, friends): they may have to pay tax on taxable components.
What your super is made up of:
- ·Tax-free component: comes from after-tax contributions. Always tax-free.
- ·Taxable component (taxed element): made up of concessional contributions and fund earnings. Taxed at 15% when paid to non-dependants.
- ·Taxable component (untaxed element): amounts that haven’t been taxed in the fund, such as insurance payouts. Taxed at 30% when paid to non-dependants.
The Role of the Transfer Balance Cap
Since July 2023, the transfer balance cap (TBC) limits how much can be transferred into a retirement income stream. For 2025, the general cap is $1.9 million, & in 2026 it will be $2 million. Amounts above this must remain in accumulation phase, where earnings are taxed at 15%.
Why does this matter for death benefits?
- ·If your super exceeds the cap, the excess may not enjoy the tax-free earnings treatment in pension phase.
- ·This can affect how much of your balance is taxable vs tax-free, and ultimately, how much tax your beneficiaries pay.
Example: Leaving Super to an Adult Child
Let’s say Michael passes away with $800,000 in super:
- ·$300,000 tax-free component
- ·$400,000 taxable (taxed element)
- ·$100,000 taxable (untaxed element)
Michael leaves his super to his 30-year-old daughter, Emma (a non-dependant).
Without Any Planning
- ·$300,000 tax-free → no tax
- ·$400,000 taxed element → taxed at 15% = $60,000
- ·$100,000 untaxed element → taxed at 30% = $30,000
Total tax = $90,000
Emma receives = $710,000
With Planning in Place
If Michael had worked with his accountant, he could have reduced the taxable component. For example, he might have used a withdrawal and re-contribution strategy:
- ·Withdrawing part of his super (tax-free after age 60), then re-contributing it as an after-tax (non-concessional) contribution.
- ·This increases the tax-free component and reduces the taxable component.
After restructuring, his super looks like this:
- ·$500,000 tax-free
- ·$300,000 taxable (taxed element)
- ·$0 untaxed element
Now, if Emma inherits the $800,000:
- ·$500,000 tax-free → no tax
- ·$300,000 taxed element → taxed at 15% = $45,000
- ·$0 untaxed element → no tax
Total tax = $45,000
Emma receives = $755,000
Savings through planning = $45,000
Without Planning
With Planning
Tax- Free
component
$300,000 (no tax)
$500,00 (no tax)
Taxable
(taxed Element)
$400,000 ($60,000 tax)
$300,000 ($45,000 tax)
Taxable
(Untaxed element)
$100,000 ( $30,000 tax)
$0 TAX
Total tax paid
$90,000
$45,000
net payout to beneficiary
$710,000
$755,000
Key Takeaways
- ·A portion of your super is always tax-free because it’s made up of after-tax contributions.
- ·Non-dependants like adult children can face significant tax bills on the taxable portion.
- ·Strategies such as re-contribution can increase the tax-free component and reduce tax.
- ·The transfer balance cap ($1.9m in 2025) limits how much can sit in the tax-free pension phase, which also impacts death benefits.
- ·With the right advice, you can save your family tens of thousands in unnecessary tax.
At Cashflow Financial, we work with you to create a clear plan that protects your wealth and maximises what your family receives.
Get in touch with our team today to discuss your superannuation and estate planning needs. The right advice now could save your family thousands later.