What happens to my Australian super when I die?

Super is not in your will

That sentence is the one most people have not been told.

The Australian Taxation Office describes what happens plainly: "When a person dies, in most cases their super fund pays their remaining super and any insurance benefits as a super death benefit to their nominated beneficiary."

The fund pays it. Not your executor, and not according to your will, unless you have deliberately routed it that way. Your super sits outside your estate until something puts it there.

Three ways it can go

A binding nomination. If the fund's rules allow one, "you can nominate your super death benefit to be received by one or more of your dependants and/or your legal personal representative (executor of your estate)". Binding means what it says: the trustee has to follow it.

A non-binding nomination, or none at all. Then "the trustee of the fund may use their discretion to decide which dependant or dependants to pay the death benefit to". They may also pay your legal personal representative instead. It is their decision, made after you are gone, and a non-binding nomination is a preference rather than an instruction.

Through your will. The ATO spells out how: "If you would like to leave your super to someone who is not a dependant under superannuation law, ask your super fund about making a binding death benefit nomination to have the payment made to your legal personal representative. This will ensure your super is distributed according to your will."

So super only ends up in your will's hands if you make a binding nomination pointing it there. It is a deliberate act, not a default.

This is a different design from New Zealand, where no nomination exists at all and everything goes through the estate by law.

Two definitions of dependant, and they do not match

Here is the part that costs families real money, and it is the ATO's own framing: "Superannuation law sets out who a death benefit is payable to, while taxation law sets out how a death benefit is taxed."

Under superannuation law, a dependant is a spouse or de facto spouse of any sex, a child of the deceased of any age, or a person in an interdependency relationship with the deceased.

Under tax law, a dependant is a spouse or de facto spouse, a former spouse or de facto spouse, a child of the deceased under 18 years old, someone in an interdependency relationship, or any other person dependent on the deceased.

Look at the child line twice. A forty year old child can be paid a death benefit, because superannuation law lets them. They are usually not a dependant for tax, because tax law stops at 18 unless they were financially dependent. The ATO is explicit: "Children over 18 years old must be financially dependent on the deceased to be considered a dependant."

An interdependency relationship needs all four of: a close personal relationship, living together, one or both providing financial support, and one or both providing domestic support and personal care. For tax, there is one extra route in, where the reason a requirement is not met is a physical, intellectual or psychiatric disability.

What the tax actually is

To a dependant, nothing. The ATO could not be clearer: "If you pay a lump sum death benefit to a dependant, the whole amount is tax-free. This is the case whether the lump sum contains a taxed element or an untaxed element."

To a non-dependant, the taxable component is taxed. Where a lump sum reaches a deceased estate and "all the beneficiaries are not dependants, you will be subject to tax on the taxable component at the rates of 15% for the taxed element and 30% for any untaxed element. Any tax-free component will not be subject to tax."

Where the beneficiaries are a mix, the ATO applies "a proportionate approach", assessing what share of the benefit each beneficiary is expected to receive. The tax-free component is never taxed either way.

That is the arithmetic behind a common and avoidable outcome: a balance made up mostly of taxable component, left to adult children, arriving 15 per cent lighter than the same money would have been in a spouse's hands.

Lump sum or income stream

A dependant can be paid "either a lump sum or income stream". Someone who is not a dependant "must be paid as a lump sum". No choice.

Children are limited further. A child can receive a death benefit income stream only if they are under 18, or under 25 and either financially dependent on the deceased or permanently disabled. Except for an adult child with a permanent disability, "the income stream must change to a lump sum on or before the date they turn 25 years old", and the ATO notes that remaining benefit is paid as "a tax-free lump sum".

An income stream the deceased was already receiving stops on death, unless the fund's governing rules make a dependent beneficiary automatically entitled to continue it, which is called a reversionary income stream.

Death benefit income streams also count against the recipient's transfer balance cap, which has its own rules and is not covered here.

What this guide does not tell you

It does not tell you whether your own fund offers binding nominations, how long one lasts before it lapses, or what form it has to take. Those are set by the fund's governing rules and vary.

It does not cover self managed funds, where the trustee making the decision may be a family member with an interest in the answer.

It does not cover what happens to a death benefit when the beneficiary lives outside Australia, or how another country taxes money that Australia has already treated as tax free.

And it does not cover what happens to a KiwiSaver in the same circumstances, which follows entirely different rules for someone with savings on both sides of the Tasman.